SWIFT is trying a blockchain, Europe targets crypto, blockchain-based video games...
October 2022 Newsletter
Once a month, our team hand-selects and comments what we believe to be the must-known or must-reads to ensure you are all caught up on the most recent developments in the world of digital assets. News are grouped per region to facilitate your pick based on interest.
REGION: NORTH AMERICA
SWIFT is trying a blockchain
According to The Register, The Society for Worldwide Interbank Financial Telecommunication (SWIFT), the well known network through which international payments are exchanged, announced, ironically, it will begin to leverage the use of a blockchain. The amusing yet significant part of this announcement comes from the fact that the SWIFT’s archaic process is one of the main reasons why digital currencies and their instantaneous exchanges throughout the world gained relevance these last few years. Actually, this future blockchain, which will run on Symbiont’s Assemby platform, won’t be about their core payment service, but it will connect their 11,000 members to inform them as soon as something happens in a publicly traded company.
With this development, SWIFT is trying to solve the discrepancy between participant’s systems throughout the world: each one of them has their own data standards that others must parse before they ingest or process info. “By bringing Symbiont’s Assembly and smart contracts together with SWIFT’s extensive network, we’re able to automatically harmonize data from multiple sources of a corporate action event,” said Tom Zschach, Chief Innovation Officer at SWIFT. With data processing accounting for approximately 30% of securities processing costs, savings are on the horizon. One can only wonder whether this is only the beginning of the transformation of SWIFT as we know it.
Coinbase is fighting back as the SEC closes in on Tornado Cash
Last August, the U.S. Treasury Department sanctioned the Tornado Cash mixer tool in relation to the laundering of the "proceeds of cybercrimes, including those committed against victims in the United States" (please refer to our August newsletter for more details). Several arguments were discussed, including whether the U.S. government can sanction a computer's code. On the other hand, one of the largest crypto exchanges in the world is at the heart of this debate. Indeed, Coinbase is supporting a lawsuit filed by six Tornado Cash users against the U.S. Treasury Department. Coinbase CEO Brian Armstrong mentioned in a press release that the Treasury Department has gone too far in sanctioning a technology tool, which has never happened before. Coinbase also argues that these measures taken by the Treasury Department could affect the privacy and security of crypto-currency users, affect people who are innocent and therefore restrict innovation, which could therefore have a negative impact on the industry at large.
The approach used by the Treasury Department has been very controversial and leaves many people divided. Yet, regardless of the initial motivations for taking such drastic measures, the Treasury Department appears cognizant that moving forward, the organization might want to consider all potential impacts of its sanctions, especially if they might lead to the very prejudices it wishes to avoid. Seeking the opinion of the general public, a "Request for Comment" was opened in connection with the approach the U.S. government should take towards crypto-currencies and their possible role in illegal financial activities - more likely than not related to the sanctions imposed on Tornado Cash.
Nasdaq Starts Crypto Custody Services For Institutional Clients
Photo by Patrick Weissenberger on Unsplash
The second largest U.S. exchange, Nasdaq, is launching a crypto custody service to meet strong demand from institutional investors. To accomplish this, the exchange has hired Ira Auerbach, who was primarily responsible for the prime brokerage service at cryptocurrency exchange Gemini.
With Nasdaq and other players like BlackRock entering the cryptocurrency market, we can see a definitive trend on Wall Street that could accelerate broader adoption and, as a result, drive sustainable growth in the crypto-currency market. These major players already know how to operate within regulatory regimes, and they can more easily adopt regulations as native cryptocurrency companies. Institutional investors are looking for companies, like Nasdaq and BlackRock, that can operate within a regulatory framework to mitigate their risks. And greater institutional player adoption calls for greater qualified digital asset custody services - which is precisely the opportunity Nasdaq aims to seize.
REGION: EUROPE
Europe’s protectionism targets crypto
Through the Markets in Cryptographic Assets (MiCA) regulation, the European Union (EU) is threatening to ban dollar-pegged stablecoins that reach a certain threshold. The stablecoins that may be impacted include the three largest in terms of market capitalization, namely: Tether (USDT), Circle (USDC) and Binance (USDB). All three of these stablecoins are backed by the U.S. dollar. The MiCA report is expected to come out in October 2022 and the consequences could be significant for the European crypto-currency market.
As a result, two major groups in the European digital asset ecosystem, Blockchain for Europe and the Digital Euro Association, have opposed MiCA's regulations through a letter. The letter makes two main arguments: 1. in the short term, EU crypto-currency investors could be exposed to significant price volatility, 2. in the long term, trading would be more expensive, there would be less competition and this would impose a barrier to innovation.
Behind this aggressive policy is probably acting the fear of losing monetary sovereignty through a currency substitution - in this case a digital dollarization of the Eurozone. A loss of monetary sovereignty causes significant costs too, such as limiting the effectiveness of monetary policy, or increasing the risks to financial stability, since it could impair the central bank’s lender-of-last-resort ability. However, the cap policy is not necessarily the best alternative or the only option (maybe a sound euro CBDC might be the answer), and in the end, the loss in competitiveness might end up more costly.
ECB selects external companies for joint prototyping of user interfaces for a digital euro
Many Central Banks across the globe are conducting research and development for Central Bank Digital Currency (CBDC), and the European Central Bank (ECB) is no exception. Indeed, the ECB is currently in the middle of a two-year investigation regarding the issuance of a digital euro. A final decision on whether the European Central Bank should issue a CBDC or not should be made in September 2023. Meanwhile, the ECB is working on a prototyping project from which it announced the selection of five external companies to develop potential user interfaces for the digital euro. Those companies include CaixaBank, Worldline, EPI, Nexi, and the giant ecommerce player, Amazon. Amongst the use cases explored in this design trial, there will be peer-to-peer online and offline payments, point of sale payments initiated by the payer and payee, and ecommerce payments.
A digital euro could foster financial innovation and improve the current payment ecosystem in Europe by bringing robust and secure real-time payments.
Société Générale launches custodial services for crypto fund managers
One of Europe's largest banks, Société Générale, has announced the expansion of its cryptocurrency asset management services. The expansion is aimed at meeting the growing investor demand for cryptocurrency related products and services, as well as facilitating the addition of cryptocurrency in investor portfolios.
Although Europe lags behind many countries in terms of cryptocurrency adoption, which is at 17% compared to the global average of 23%, the European Central Bank (ECB) mentioned in a report that demand for cryptocurrencies has increased and this is despite the risks. By allowing asset managers to offer cryptocurrency funds, Société Générale is providing a secure and less risky environment for investors that is compliant with European regulations, and thus helping to promote the adoption of the cryptocurrency market in Europe.
REGION: MIDDLE EAST AND AFRICA
The ‘Sandbox’ to develop metaverse city in Dubai
Animoca’s brand, the Sandbox announced during the 62nd edition of the ‘True Global Ventures Conference’ that it will be bringing its metaverse strategy to Dubai. According to the company, the Dubai metaverse city, called ‘Dubaiverse’ will be launched through local partners that include UAE media group. Dubaiverse will be built through local partnerships, including firms in the film, music, entertainment, acting, finance, real estate, and gaming industries. Animoca Brand’s Dubai-themed metaverse will mirror the Sandbox’s Hong Kong ‘Mega City,’ a gaming metaverse and virtual cultural hub based on the Asian financial hub of Hong Kong. Dubai seems to be hosting events and attracting global players to its space that align with its vision of being a global crypto hub. With countries like India and China being stringent on crypto companies, we can expect crypto firms to migrate to crypto friendly locations such as Dubai. Moreover, digital assets are a gateway to the metaverse, which in turn leads to greater opportunities. The metaverse has quite a diverse range of use cases being developed and is merging into Web3 too. The creation of the Dubaiverse is quite strategic to strengthen its position in the overall Web3 universe.
UAE participates in IFA Working Group meeting within G20 Finance Track for 2022
The UAE recently participated in the fifth International Financial Architecture (IFA) Working Group meeting within the G20 Finance Track for 2022, which was held in a hybrid format on the 22nd and the 23rd of September 2022. During the meeting, the UAE team reviewed the country’s key financial stability components and developments. The team also stressed on the need to work on a comprehensive regulatory framework for central bank digital currencies that would facilitate, accelerate, and reduce the cost of cross-border monetary operations, in addition to previewing the UAE’s experience in the "mBridge" project for building multi central bank digital currencies (CBDC). The Multiple CBDC (mCBDC) Bridge is a wholesale central bank digital currency (CBDC) co-creation project that explores the capabilities of distributed ledger technology (DLT) and studies the application of CBDC in enhancing financial infrastructure to support multi-currency cross-border payments. The attendees discussed CBDC for cross-border payment and implication on the international monetary system and capital flows. UAE’s involvement with CBDC might influence the neighboring Gulf countries to start investigating, testing or collaborating on CBDC initiatives.
What to expect as Flutterwave adds the eNaira as a payment option for merchants
Flutterwave, a top-tier African payment solutions company, has announced the inclusion of the eNaira as a payment option for merchants, a move aimed at accelerating the adoption of the Central Bank of Nigeria digital currency. This new development is expected to complement other existing payment methods on Flutterwave such as cards, bank transfers, and Barter by Flutterwave among others. Flutterwave’s users can either scan QR codes or generate single-use tokens using the app to complete transactions on its platform, and merchants can enable the eNaira payment option on their dashboard for their customers’ use.
To achieve wider adoption, the CBN is targeting 8,000,000 active users for the second phase of the eNaira project and is continually using different methods, one of which is the partnership with private institutions to reach and surpass the target. Central Banks seem to have realized that they cannot independently achieve adoption goals without partnerships. Leveraging the user base of private institutions to promote adoption may be a faster approach. Currently physical cash does not attract transaction charges in most nations. As CBDCs are a digital version of physical cash, Central Banks may not be willing to charge a fee for CBDC transactions. If Central Banks cannot organically generate returns from these transactions, Central Banks may need to build business and operating models to incentivise private institutions to promote adoption.
REGION: ASIA PACIFIC
The giant who wants to become the Steam of blockchain
One of the biggest Asian video game companies wants to launch a Steam-like platform based on blockchain explains VentureBeat. Wemade is known in Asia for the series The Legend of Mir, a multiplayer online roleplaying game which reunited a community of 500 millions players. Their last entry, Mir 4, uses a blockchain-based token called Draco with which players can buy items, trade their characters as non-fungible tokens (NFTs) and even trade it for real cash. To push this idea forward, Wemade has launched Wemix, a new blockchain gaming platform which has the potential to host blockchain games made by other companies. In the future, the service will even include a stablecoin token: WEMIX$. Currently, players can just find a few games on the service, but Henry Chang, the CEO, hopes to hit 100 games by the end of the year.
The major problem for Wemade is that players hate blockchain-based video games, due to their poor quality in general and, above all, their microtransactions principles which tend to transform the game into a cash machine. There is an unspoken rule in the gamers community: the initial purchase must contain the majority of the experience. So, if NFTs or any microtransactions are involved in any way, they have to be a real game mechanic fused into the game and its community, not just a means to take cash from the gamer’s pockets. But Henry Chang thinks this will be different this time: he hopes to convince gamers thanks to the games' high quality.
Regardless of the success of the Wemix platform, the video game industry will certainly remain one of the leading markets for digital asset-related business. These companies have long been building bridges between the real and virtual worlds, so it would seem logical to consider them one of the outposts of blockchain at the industrial level. On a larger scale, the GameFi - this mix of game mechanics, blockchain technology and NFT designed to create a virtual environment in which a player can earn tokens/money - goes far beyond the video game industry and is poised to spread across all sectors, exactly as the gamification did it over the past decade for the marketing industry. One more reason to closely monitor these gaming innovations.
China Central Bank Releases Digital CNY Smart Contract Prepaid Fund Management Product
According to the China Financial Association, the Digital Currency Research Institute of the People's Bank of China has launched a digital renminbi smart contract prepaid fund management product. It aims to provide users with prepaid consumption service scenarios by deploying smart contracts on digital RMB wallets. This product solves the problem that users avoid merchants running away with prepaid consumption and protects consumers' rights and interests. This seems to be a unique approach to leveraging CBDC technology by using smart contracts to drive efficiency and financial integrity. We expect more such unique use cases to come about CBDCs.
Russian Central Bank moves to legalize cryptocurrency for international payments
Russia’s central bank is set to allow cryptocurrencies to be used for cross-border settlements due in large part to the current geopolitical fallout. Putin’s government was slapped with punitive sanctions after invading its eastern European neighbor Ukraine. Allowing cross-border payments in crypto would thus help buffer the impact of the unprecedented financial sanctions imposed by Western powers, which have seen Russia’s access to international payment mechanisms severely restricted. The Central Bank had previously called for a full ban on crypto. Russian President Vladimir Putin in July signed a law banning the use of cryptocurrencies as a means of payment for goods, services, and products across the nation. However, the Russian Federation is now considering legitimizing the use of crypto in international transactions soon. It is interesting to note that cryptocurrencies have become a lifeline to nations hit by sanctions. What is yet to be seen is if cryptocurrencies are sanction proof.
ENOUGH OF INTENSE NEWS… SOMETHING LIGHTER ;)
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BlockZero is a boutique consulting firm specializing in the evolution of the financial infrastructure through digital assets, digital currency, stablecoins and Central Bank Digital Currency (CBDC).
BlockZero advises global financial institutions, central banks and financial technology companies in the exploration, experimentation, technical implementation and rolling out of digital asset-based infrastructure.
BlockZero offers market intelligence services that can be tailored based on the clients needs and contexts to help inform decision-making. In addition, once a month our team summarizes through our Monthly Newsletter the market movements and what we have been following for our client and ourselves. We issue Thought Leaderships on specific topics that discuss topics and issues that are relevant to our clients in this rapidly evolving space.