Progress in fast payment systems

As we contemplate new forms of money (both Central Bank Digital Currencies and new forms of private money like stablecoins), JP Koning makes the case that the modern payment systems available in the conventional financial system have improved more than is often appreciated …

The speeding up of modern payments is a great success story. Let me tell you a bit about it.To begin with, central banks and other public clearinghouses have spent the last 15-or-so years blanketing the globe with real-time retail payments systems. Europe has TIPS, UK has Faster Payments, India has IMPS, Sweden has BiR, Singapore FAST. There must be at least thirty or forty of these real-time retail payments system by now. 

The speed of these new platforms get passed on to the public by banks and fintechs, which are themselves connected to these core systems.

That is not to say they are perfect but it is helpful to properly understand what has been done already in order to better understand what the new forms truely offer.

You can read his post here ..

Tony – From the Outside

Stablecoin backing

… is a hot topic full of claims, counter claims and clarifications. Tether’s USDT token has been getting the bulk of the attention to date but questions are now being asked about Circle’s USDC token (a cryptographic stored value token or stablecoin that allows users to trade crypto assets).

My understanding is that USDC is one of the better (in relative terms) stable coins regarding backing and disclosure but this analysis from Amy Castor argues that is still not especially good and may be getting worse. The Financial Times makes a similar argument.

The broad problem they outline

  • Stablecoins generally start out with a promise that each coin is backed 1:1 with fiat currency (typically USD) or fully reserved
  • Ideally those fiat currency reserves are held on deposit in a bank on a custodial basis
  • Over time that simple promise becomes more nuanced with qualifications that dilute the fiat currency component and introduce concepts like “approved investments”
  • The location of the deposit may also become ambiguous
  • Not always clear if the backing itself has evolved or the disclosure evolves in response to questioning

USDT has been the most high profile example of asset backing being understood to be USD cash but evolving into something USD based but not always 100% cash or necessarily liquid. The two sources cited above suggest that USDC backing may also be less than 100% USD.

Amy Castor points to the change in USDC disclosure between February and March 2021 as evidence of an apparent change in (or clarification of?) the composition of the reserve backing.

Source: Amy Castor, “What’s backing Circle’s 25B USDC? We may never know”

As always I may be missing something, and maybe this is just my traditional banking bias, but Amy poses what seem to me to be pretty reasonable questions like “what are those approved investments? Who approves them? What percentage of assets are in that category?” that Circle is yet to answer.

Tony – From The Outside

My Adventures in CryptoLand – Net Interest

Marc Rubinstein lays out a detailed account of his initial explorations of decentralised finance. His professional background (like mine) is grounded in the conventional financial system so I found this very useful. Even better it is a short read with some hard numbers (time and cost) on the user experience.

My only quibble is that he calls these decentralised financial entries “banks”. Call me pedantic but none of the institutions discussed are banks and I think the distinction still matters if we want to understand how much of conventional banking will remain as this new chapter in financial innovation plays out.
Link to Marc’s blog here –

Tony – From the Outside

Tether offers a bit more detail on the composition of its reserves

… but Jemima Kelly at FT Alphaville remains a sceptic. I think the FT headline is a bit harsh (“Tether says its reserves are  backed by cash to the tune of . . .  2.9%”). Real banks don’t hold a lot of “cash” either but the securities they hold in their liquid asset portfolios will tend to be a lot better quality than the securities that Tether disclosed.

The role of real banks in the financial system may well be shrinking but the lesson I take from this FT opinion piece is that understanding the difference between these financial innovations and real banks remains a useful insight as we navigate the evolving new financial system.

Let me know what I am missing …

Tony – From the Outside

Explaining the value of Dogecoin

I don’t profess to be able to explain the value of Dogecoin but Matt Levine offers an interesting perspective curtesy of a research report published by Galaxy Digital Research. Apart from the left field explanation of what underpins Dogecoin’s value, the relatively short report (22 pages) offers a useful recap of the story of how this variation of digital money came to be.

Here is a short extract from the report

“When we set out to write this report, we expected to find what we’ve always known: Dogecoin is a joke, but it’s also a joke… not credible, resilient, or adopted. But as we reviewed the data, we found that, despite its deficiencies, Dogecoin has remarkably strong fundamentals and powerful forces supporting its rise: a genuine origin story, longevity, and a growing community of users who appear determined to meme a Shiba Inu-themed global currency into existence. We don’t expect Dogecoin to become the world’s most valuable cryptocurrency any time soon, but DOGE should not be ignored.”

“Dogecoin: The Most Honest Sh*tcoin” by Alex Thorn, Head of Firmwide Research and Karim Helmy, Research Associate, Galaxy Digital Research, 4 May 2021

Matt’s column has a link to the report itself which is worth a read if you are interested in Dogecoin in particular or the broader topic of digital money.

Tony – From the Outside

Central bank digital currency

Izabella Kaminska (FT Alphaville) offers another perspective on what the development of a Central Bank Digital Currency CBDC) by the People’s Bank of China means for China itself, the rest of the world and the USD in particular.

Her column is titled “Is the central bank panic about the PBOC coin justified?”. It is not clear that central banks are actually panicking at this stage (equally I am not sure that Isabella has 100% control over the titles her sub-editors apply to her articles). The article does however offer some balance to the narrative that sees China’s moves in this space forcing other central banks to follow suite.

I am yet to fully come to terms with the questions posed in her article but this (for me at least) is definitely an area to watch and seek to understand.

Izabella has been a reliable source of insight on this and the broader questions associated with the increased role of fintech in our payment systems. I can also recommend a column she wrote in July 2019 titled “Why dealing with fin techs is a bit like dealing with pirates”. A paper by Tobias Adrian and Tommaso Mancini-Griffoli titled “The Rise of Digital Money” is also worth reading if you are interested in this topic (one of my posts offers a short overview of the paper and a link to the original).

Tony – From the Outside

JP Koning – What Tether Means When It Says It’s ‘Regulated’ – CoinDesk

Useful article on Coindesk discussing what underpins the integrity of one of the more popular forms of Stabecoins

“Newcomers to the crypto space are quickly confronted with a popular distinction between regulated stablecoins and unregulated stablecoins. But what is the difference? Tether, the largest of the stablecoins, is often described as unregulated. But Tether executives and supporters disagree with this claim. Who is right?”
— Read on

I don’t profess any real insight or expertise in this space but it does feel to me like a question that any serious student of banking needs to come to terms with.

Tony – From the Outside