Fiat Money

Hong Kong believes stablecoin volatility can spillover to traditional finance

According to Hong Kong’s central bank, the interconnection of crypto assets has made the crypto ecosystem more vulnerable to systematic shocks.

The fall of crypto giants this year reignited questions about the stability of cryptocurrencies and their impact on fiat ecosystems. Hong Kong Monetary Authority (HKMA) assessed the situation and found that the instabilities of crypto assets, including asset-backed stablecoins, can potentially spill over to the traditional financial system.

The HKMA assessment on asset-backed stablecoins pointed out the risks of liquidity mismatch, negatively impacting their stability during “fire-sale” events. A fire sale event relates to a momentary price fluctuation when investors can purchase stablecoins cheaper than their market price — a phenomenon noticed during the Terra crash.

According to Hong Kong’s central bank, the interconnection of crypto assets has made the crypto ecosystem more vulnerable to systematic shocks. In addition, the increase in crypto exposure from financial institutions can be subject to knock-off effects from abrupt developments in cryptocurrency prices:

“The growing size of asset-backed stablecoins, together with their inherent risks, could make asset-backed stablecoins a potential magnifier of the volatility spillover from crypto to traditional financial assets.”

The flowchart shared by HKMA suggests that fluctuations in the price of asset-backed stablecoins could result in reserve adjustment by stablecoins. This is mainly driven by the assumption that the demand and supply of stablecoins can trigger volatility in their price.

Illustration of Tether’s transaction mechanism and spillover channel from crypto to traditional financial assets. Source: HKMA

The study also recalled the crash of Terra USD (UST), an algorithmic stablecoin issued by Terraform Labs, which had caused mass redemption of Tether (USDT). In this light, HKMA recommended standardizing regular disclosures that can help regulators inspects liquidity conditions and risks.

The second recommendation for regulators is to strengthen the asset-backed stablecoins’ liquidity management via restrictions on the composition of reserve assets.

Related: Could Hong Kong really become China’s proxy in crypto?

The Securities and Futures Commission of Hong Kong advised management companies looking to offer exchange-traded fund (ETF) offerings to “have a good track record of regulatory compliance,” among other requirements.

The SFC circular came as part of a policy update from Hong Kong’s government, which announced its readiness to engage with global crypto exchanges on regulatory issues.

Binance CEO CZ begins working on Vitalik Buterin’s ‘safe CEX’ ideas

While long-term solutions will need the involvement of multisig and social recovery wallets, Buterin pointed out two alternatives for the short-term — custodial and noncustodial exchanges.

The collapse of numerous major crypto ecosystems in 2022 revealed the urgent need for revamping the way crypto exchanges operate. Ethereum co-founder Vitalik Buterin believed in exploring beyond “fiat” methods to ensure the stability of crypto exchanges, including technologies such as Zero-Knowledge Succinct Non-Interactive Argument of Knowledge (zk-SNARKs). 

Following a discussion with angel investor Balaji Srinivasan and crypto exchanges such as Coinbase, Kraken and Binance, Buterin recommended options for the creation of cryptographic proofs of on-chain funds that can cover investor liabilities when required, also known as safe centralized exchanges (CEX).

The best case scenario, in this instance, would be a system that does not allow crypto exchanges to withdraw a depositor’s funds without consent.

Fellow crypto entrepreneur CZ, who has been vocal about Binance’s intent for complete transparency, acknowledged the importance of Buterin’s recommendations, stating:

“Vitalik’s new ideas. Working on this.”

The earliest attempt to ensure fund safety was proof of solvency, wherein crypto exchanges publish a list of users and their corresponding holdings. However, privacy concerns eventually fueled the creation of the Merkle tree technique — which dampened the privacy leakage concerns. While explaining the inner workings of the Merkle tree implementation, Buterin explained:

“The Merkle tree technique is basically as good as a proof-of-liabilities scheme can be, if only achieving a proof of liabilities is the goal. But its privacy properties are still not ideal.”

As a result, Buterin placed his bets on cryptography via zk-SNARKs. For starters, Buterin recommended putting users’ deposits into a Merkle tree and using a zk-SNARK to prove the actual claimed value. Adding a layer of hashing to the process would further mask information about the balance of other users.

Buterin also discussed implementing proof of assets for confirming an exchange’s reserves while weighing the pros and cons of such a system, considering that crypto exchanges hold fiat currencies and the process would require crypto exchanges to rely on trust models better suited for the fiat ecosystem.

While long-term solutions will need the involvement of multisignature and social recovery wallets, Buterin pointed out two alternatives for the short-term — custodial and noncustodial exchanges, as shown below:

Two short-term options for alternatives for safe CEX. Source: hackmd.io (via Vitalik Buterin)

“In the longer-term future, my hope is that we move closer and closer to all exchanges being non-custodial, at least on the crypto side,” added Buterin. On the other hand, highly centralized recovery options can be used for wallet recovery for small funds.

Related: Crypto self-custody a ‘fundamental human right’ but not risk-free: Community

On Nov. 4, Buterin added a new category of milestones to the Ethereum technical roadmap — aimed at improving censorship resistance and decentralization of the Ethereum network.

The updated technical roadmap now inserts the Scourge as a new category, which will run parallel to other previously-known segments — the Merge, the Surge, the Verge, the Purge and the Splurge.

We need to move a lot faster on Global South Bitcoin adoption — Paxful CEO

“The Global South is where we should be looking” for Bitcoin adoption, Paxful CEO Ray Youssef told Cointelegraph in an interview at the gym.

Cointelegraph hit the gym with Ray Youssef, co-founder and CEO of Paxful, to tackle Bitcoin adoption in the Global South. In between sets and a little out of breath, Youssef told Cointelegraph, “The Global South is where we should be looking” for Bitcoin (BTC) adoption.

A New Yorker born in Egypt, Youssef regularly visits Africa and the Global South to promote Bitcoin and peer-to-peer finance. He is determined to bring Bitcoin to those living and working across Africa and to undermine the “economic apartheid” created by government-issued fiat money.

Youssef is a firm believer that government-backed, fiat money is a scourge on human progress. He posited, “Creating money is the greatest creative opportunity of any government,” before launching into a diatribe against Western governments as he pumped iron. Nonetheless, thanks to Bitcoin, people around the world — especially in the Global South — now have the means to fight back against economic repression:

“The good news is we have a few tools at our disposal. We have the internet, we have mobile phones, and now, we have Bitcoin peer-to-peer, electronic cash.”

Youssef’s business, Paxful, currently numbers 10 million users worldwide. But the CEO explained that the crypto community needs to move a lot faster in order to reach a billion users in the next five to 10 years. He referred to the explosive growth of telecommunication companies such as M-Pesa in Kenya as examples that adoption can flourish rapidly:

“The telcos have shown us the path, but we aren’t listening. We’re still trying to replace banks with wallets, and that is not the path to a billion citizens. We need something more.”

Ultimately, the key to unlocking growth in emerging markets is teaching citizens about Bitcoin and the properties of hard money, Youssef believes.

“A focus on education is great. But primarily we have to shift away from this mindset that we have right now of just replacing banks with wallets.”

It’s true that Bitcoin wallets do act as a replacement for banks. In El Salvador, for example — a heavily unbanked country — Bitcoin adoption onboarded 4 million users in a year: 70% of the unbanked population gained international payment and remittance services.

However, Youssef went one step further, envisioning a world where Bitcoin helps the unbanked trade and transact freely, creating an abundance of entrepreneurship.

Related: Bitcoin in space is good for user privacy, says Adam Back

Finally, Youssef also joked that Ronnie Coleman, a bodybuilder and eight-time Mr. Olympia winner, would be a Bitcoiner. Cointelegraph reached out to Coleman for comment and will update when possible. 

Reserve Bank of India to reportedly launch digital rupee pilot in November

Now debuting a wholesale CBDC, the RBI plans to launch the digital rupee for the retail segment within a month in select locations.

The Reserve Bank of India (RBI) is on track to debut a central bank digital currency (CBDC) after announcing its digital rupee project in February.

The central bank of India will launch the digital rupee pilot for the wholesale segment on Nov. 1, the RBI announced on Oct. 31.

The pilot will involve nine locally operating banks, including the biggest Indian bank, the State Bank of India. According to a report by Reuters, other banks in the pilot will also include Bank of Baroda, Union Bank of India, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Yes Bank, IDFC First Bank and HSBC.

The main use case of India’s CBDC pilot will be to settle secondary market transactions in government securities. The digital rupee is expected to add more efficiency to the interbank market by reducing transaction costs of settlements, the RBI said.

Wholesale CBDCs are a type of CBDC primarily used by financial institutions like banks, involving interbank transactions such as securities settlement and cross-currency payments.

Unlike wholesale CBDCs, retail CBDCs are utilized by households and businesses, allowing them to make payments directly and store value via the digital version of a specific fiat currency, like the Indian rupee. According to the new report, the RBI plans to launch the digital rupee for the retail segment within a month in select locations.

India has been somewhat quick in launching a CBDC. Indian Finance Minister Nirmala Sitharaman announced the initial plans in February 2022, declaring that a digital rupee would be a “big boost” for India’s economy. The RBI then proposed a three-step graded approach for its rollout, aiming for little or no disruption to the traditional financial system.

Related: India ranks third in the world in terms of Web3 workforce size

While rushing the CBDC’s development, the Indian government has been taking measures to make crypto less attractive for local investors, including adopting a 30% tax on digital asset holdings and transfers in April. As previously reported by Cointelegraph, the new crypto taxes had a negative impact on the country’s crypto ecosystem, forcing industry entrepreneurs to move to friendlier jurisdictions.

Greg Foss says Bitcoin is a hedge against monetary inflation: Bitcoin Amsterdam

As global inflation rumors continue to circulate, debates rage on both inside and outside of the decentralized finance space on whether Bitcoin is the answer.

Inflation is a buzzword penetrating the finance world, both traditional and decentralized. International leaders continue to debate whether current circumstances can be deemed a recession. While financial industry experts ponder a solution to the situation.

As cryptocurrencies continue to become regulated, adopted and pushed into mainstream view, questions as to whether digital currencies such as Bitcoin (BTC) are the answer.

In the past, stablecoins have been used as a solution to protect savings from inflation. This can be seen in countries such as Venezuela, Nigeria and Argentina, where local populations have been fighting major instances of currency devaluation.

At the Bitcoin Amsterdam conference on Oct. 12, Cointelegraph spoke with Greg Foss, executive director of strategic initiatives at Validus Power Corp, about whether crypto and Bitcoin, in particular, is a viable inflation exit strategy. 

Despite scrutiny toward Bitcoin’s role as an inflation hedge due to current market conditions, Foss believes it is one of the “most important technological and financial solutions to our looming debt crisis.”

The executive participated in a panel discussion if Bitcoin is the answer to the inflationary warnings.

“In my opinion, it is 100% a hedge to monetary inflation. What other solution is there? I don’t see any.”

However, Foss highlighted digital currency as a hedge specifically against monetary inflation rather than a Consumer Price Index (CPI) hedge. Although the two are correlated, he said:

“Bitcoin has not performed as a pure CPI hedge, because monetary ease has been withdrawn from the system. It’s what’s caused all of our stocks to fall.”

He further stated that, over time, he believes Bitcoin’s role will develop, but it is still young.

As Bitcoin continues to be questioned as an answer to inflation, gold has been a classic example of a safe investment in times of market volatility.

Related: The market isn’t surging anytime soon — So get used to dark times

When asked about Bitcoin’s role in relation to gold as a hedge to monetary inflation hedge, Foss highlighted the fact that the total supply of gold is unknown, whereas with Bitcoin, it is 100% available knowledge.

“There is protection in gold. But in my opinion, Bitcoin is far superior. It’s got math and code. It’s defended by a decentralized protocol. You don’t mess with math.”

According to the executive, the way to do that is neither zero nor 100% allocation to a specific asset. “That’s the beauty of an asymmetric trade opportunity,” he concluded. 

Regulated fintech in Bahrain enables crypto payments with Binance

The Central Bank of Bahrain gives the nod to EazyPay, launching crypto payments for more than 5,000 payment gateways in the country.

Cryptocurrency adoption continues growing in the Kingdom of Bahrain, with local companies enabling payments in crypto like Bitcoin (BTC).

EazyPay, an online payment platform regulated by the Central Bank of Bahrain (CBB), has partnered with Binance Pay to enable crypto payments in the country, EazyPay CEO and founder Nayef Tawfiq Al Alawi announced on Wednesday.

The newly launched crypto payment option will be available in more than 5,000 point-of-sale (POS) terminals and online payment gateway across Bahrain, the CEO said.

Major local merchants and firms, including Lulu Hypermarket, Sharaf DG, Al Zain Jewelry and Jasmi’s, will be able to accept more than 70 cryptocurrencies as payment by scanning the QR code from Eazy’s POS using Binance App.

Al Alawi emphasized that ‎‏Eazy Financial Services is licensed and regulated by Bahrain’s central bank as the fifth POS and online payment gateway acquirer and payment services provider.

“Special thanks go to the Central Bank of Bahrain, Binance and Eazy Financial Services,” he noted. Khalid Hamad Al Hamad, executive director of the banking supervision at the CBB, also congratulated Eazy on rolling out the new crypto payment service.

Binance CEO Changpeng Zhao noted that EazyPay’s crypto payment feature would be the “first regulated and approved crypto payments service offering” in the Middle East and North Africa region. As previously reported, Binance received several regulatory approvals in Bahrain, including a crypto service provider license and the Category 4 license.

The third-smallest country in Asia, Bahrain, has been actively adopting cryptocurrency over the past few years. In 2019, the CBB issued a framework for a range of crypto-related activities, officially establishing rules for licensing, governance, risk management, Anti-Money Laundering standards, reporting, security and other rules for crypto-asset services.

Related: OpenNode sets up BTC payment infrastructure in Bank of Bahrain regulatory sandbox

Bahrain has been actively experimenting with crypto and blockchain technology since adopting crypto regulations. In January 2022, The CBB completed a digital payments trial in collaboration with JPMorgan’s blockchain and cryptocurrency unit Onyx. CoinMENA, a major local crypto exchange regulated by the CBB, in June announced plans to expand its crypto trading services into Egypt.

Digital bank FV Bank integrates USDC stablecoin for direct deposits

Apart from USDC support, FV Bank also plans to launch a custody service in Q4 2022, targeting major coins like Bitcoin and Ethereum.

The global digital bank FV Bank is the latest financial platform to enable deposits in Circle-backed stablecoin USD Coin (USDC).

FV Bank on Wednesday announced the launch of a new service allowing its account holders to make direct deposits in USDC to the bank’s U.S. dollar accounts. The new feature enables customers to receive USDC on their accounts similar to traditional deposits like wire or the automated clearing house network.

According to the announcement, received USDC funds are instantly and automatically converted into the U.S. dollar (USD) at the moment of deposit. This new solution allows FV Bank users to send invoices to their international clients in USDC, enabling faster and cheaper transactions as well as conversions, the firm said.

“We believe this feature will greatly enhance the user experience and open up more frictionless commerce,” FV Bank CEO Miles Paschini told Cointelegraph.

Paschini pointed out that USDC will be the first stablecoin accepted for deposit into USD at this time, but FV Bank might consider more stablecoins in the future.

“We have chosen USDC due to its licensing, reserve attestations and the real time 1:1 liquidity,” the CEO noted.

Apart from integrating USDC, FV Bank also plans to launch its own custody service in Q4 2022, allowing customers to hold digital assets in a custodial account alongside their depositary account. According to Paschini, FV Bank’s custody will support major cryptocurrencies like Bitcoin (BTC), Ether (ETH) and other coins, “based upon our supported assets criteria.”

FV Bank is a crypto-friendly digital bank regulated by the Office of the Commissioner of Financial Institutions in Puerto Rico. The company originally planned to roll out cryptocurrency custody services in 2021, following the suit of major U.S. banks like Standard Chartered.

According to the CEO, the firm’s crypto roadmap has not suffered any issues despite the ongoing crypto winter.

“Overall, the ‘bear market’ has not impacted our business as we continue to grow and expand our services in a responsible way,” Paschini said.

FV Bank is not the only financial institution integrating USDC. On Tuesday, crypto-friendly stock trading app Robinhood announced the listing of USDC. The stablecoin will become available for transfer on both Polygon and Ethereum networks Wednesday.

Related: Circle co-founder says converged dollar books on Binance would be good for USDC

While FV Bank and Robinhood are moving to add USDC support, some major companies have recently opted to limit some USDC services.

On Sept. 6, Binance announced plans to suspend trading of USDC alongside other stablecoins like Pax Dollar (USDP) and TrueUSD (TUSD), citing liquidity and capital efficiency purposes. The Indian exchange WazirX subsequently followed Binance in announcing the same measures and offering Binance-backed Binance USD (BUSD) stablecoin instead.

Crypto’s adaptability, openness key to ideal monetary system, say BIS execs

Some of the biggest flaws preventing present-day cryptocurrencies from mainstream adoption, pointed out by the BIS execs, are bottleneck congestion in DeFi and the reliance on volatile assets.

Governments across the globe see central bank digital currencies (CBDC) as a means to improve the existing fiat ecosystem. Cryptocurrency’s technical prowess supported by the central bank’s underlying trust is key to enabling a rich monetary ecosystem, suggests an International Monetary Fund (IMF) publication. 

“Digital technologies promise a bright future for the monetary system,” reads the publication attributed to IMF deputy managing director Agustín Carstens and BIS executives Jon Frost and Hyun Song Shin.

A BIS study from June revealed that cryptocurrencies outdo fiat ecosystems when it comes to achieving the high-level goals of a future monetary system.

Some of the most significant flaws preventing present-day cryptocurrencies from mainstream adoption, pointed out by the BIS execs, are bottleneck congestion in decentralized finance (DeFi) and the reliance on volatile assets.

Both wholesale and retail CBDCs can potentially inherit abilities from the crypto ecosystem that benefit end users, the post highlighted:

“By embracing the core of trust provided by central bank money, the private sector can adopt the best new technologies to foster a rich and diverse monetary ecosystem.”

It further recommended central banks utilize innovations such as tokenization to allow purchases using multiple fiat currencies — further benefiting merchants and customers.

Related: India cooperates with IMF on crypto consultation paper

The IMF’s gloomy forecast predicting a global economic slowdown raised concerns about an incoming recession in the crypto markets. Cointelegraph previously reported that Bitcoin (BTC) markets were likely to recover when the uncertainty about the current state of the economy and geopolitical tensions are resolved.

However, the IMF pointed out that the various liquidations, bankruptcies and losses at major firms like Celsius, Three Arrows Capital and Voyager Digital Holdings had only a minor impact on traditional financial systems.

Crypto’s adaptability, openness key to ideal monetary system, say BIS execs

Some of the biggest flaws preventing present-day cryptocurrencies from mainstream adoption, pointed out by the BIS execs, are bottleneck congestion in DeFi and the reliance on volatile assets.

Governments across the globe see central bank digital currencies (CBDC) as a means to improve the existing fiat ecosystem. Cryptocurrency’s technical prowess supported by the central bank’s underlying trust is key to enabling a rich monetary ecosystem, suggests an International Monetary Fund (IMF) publication. 

“Digital technologies promise a bright future for the monetary system,” reads the publication attributed to IMF deputy managing director Agustín Carstens and BIS executives Jon Frost and Hyun Song Shin.

A BIS study from June revealed that cryptocurrencies outdo fiat ecosystems when it comes to achieving the high-level goals of a future monetary system.

Some of the most significant flaws preventing present-day cryptocurrencies from mainstream adoption, pointed out by the BIS execs, are bottleneck congestion in decentralized finance (DeFi) and the reliance on volatile assets.

Both wholesale and retail CBDCs can potentially inherit abilities from the crypto ecosystem that benefit end users, the post highlighted:

“By embracing the core of trust provided by central bank money, the private sector can adopt the best new technologies to foster a rich and diverse monetary ecosystem.”

It further recommended central banks utilize innovations such as tokenization to allow purchases using multiple fiat currencies — further benefiting merchants and customers.

Related: India cooperates with IMF on crypto consultation paper

The IMF’s gloomy forecast predicting a global economic slowdown raised concerns about an incoming recession in the crypto markets. Cointelegraph previously reported that Bitcoin (BTC) markets were likely to recover when the uncertainty about the current state of the economy and geopolitical tensions are resolved.

However, the IMF pointed out that the various liquidations, bankruptcies and losses at major firms like Celsius, Three Arrows Capital and Voyager Digital Holdings had only a minor impact on traditional financial systems.

Official explains why China CBDC should not be as anonymous as cash

While cash is associated with more anonymity, it’s still less mobile and easy to use in large amounts than a digital currency, China’s CBDC project lead Mu Changchun said.

China’s central bank digital currency (CBDC) should not be as anonymous as cash, the head of the People’s Bank of China (PBoC) digital currency institute declared.

Digital yuan project lead Mu Changchun spoke of China’s CBDC project at the 5th Digital China Construction Summit on Monday, local financial publication Sina Finance reported.

Since debuting the digital yuan in 2020, the Chinese central bank has never targeted complete anonymity for the project, Mu said at the event. Instead, PBoC has been working to enable only limited anonymity in compliance with global Anti-Money Laundering (AML) regulations, the official stated.

The Chinese authorities should be able to access CBDC data on people suspected of crimes, Mu noted. According to the official, partial anonymity is an important feature of the digital yuan project though, as it guarantees transaction privacy and personal information protection.

However, a completely anonymous CBDC would interfere with the prevention of crimes like money laundering, terrorism financing, tax evasion and others, he added.

While cash is associated with more anonymity, it’s less mobile and easy to use in large amounts than a digital currency, Mu emphasized. “The inconvenient nature of carrying cash increases friction for money laundering and terrorism financing. Therefore, the tolerance for the anonymity of cash is relatively low,” the official stated, adding:

“The central bank’s digital currency is more portable. If it provides the same anonymity as cash, it will greatly facilitate illegal transactions such as money laundering. Therefore, the central bank’s digital currency should not have the same anonymity as cash.”

Mu went on to say that regulators risk encountering “serious consequences” if they choose to only focus on privacy protection and ignore the risks associated with financial crimes. “Freedom without constraints is not true freedom,” he added.

Despite rejecting anonymous online financial transactions, PBoC has still been working to ensure the privacy of the digital yuan. According to PBoC governor Yi Gang, the digital yuan has ambitions to be more privacy-enhanced than payment apps.

Related: China’s BSN chair calls Bitcoin Ponzi, stablecoins ‘fine if regulated’

The problem of user privacy has emerged as one of the biggest issues associated with CBDC projects worldwide. Regulators became puzzled about how to preserve digital privacy while also tracking transactions to prevent illicit financial activity.

In May, the European Central Bank (ECB) suggested that “CBDC with anonymity” was preferable to traditional digital payments like bank deposits in another working paper related to the digital euro. The proposal came shortly after the ECB admitted that digital euro designs lacked privacy options.