Digital Currency

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The order directs federal agencies to focus on six priority areas within the digital asset sector and potential development of a US CBDC.

By Alan W. Avery, Yvette D. Valdez, Stephen P. Wink, Pia Naib, Adam Bruce Fovent, and Deric Behar

On March 9, 2022, President Biden issued an Executive Order on Ensuring Responsible Development of Digital Assets (Order). In the face of rapid advancement in blockchain technology and its applications, the Order asserts that “an evolution and alignment” in the approach of the various federal agencies (Agencies) to digital assets is necessary. It directs the Agencies to study the risks of digital assets to the US economy, investors, and consumers, and to explore the development of a US central bank digital currency (CBDC). The Order also directs the Agencies to monitor and assess the impact of digital assets on financial stability and financial system integrity, the prevention of crime and illicit finance, national security, financial inclusion and equity, energy policy, and climate change.

In a long-awaited paper, the FRB continues its exploratory approach and emphasizes the need for congressional support.

By Alan W. Avery, Pia Naib, and Deric Behar

On January 20, 2022, the Board of Governors of the Federal Reserve System (FRB) published its long-awaited discussion paper (the Paper) on the potential benefits and risks of issuing a US central bank digital currency (CBDC). The Paper, titled “Money and Payments: The U.S. Dollar in the Age of Digital Transformation,” is intended to initiate a discussion around the various factors the FRB is considering with respect to a potential US CBDC rather than “advance a specific policy outcome.”

In a new publication, ISDA explores the benefits of digitization and blockchain solutions for global foreign exchange derivatives markets.

By Yvette D. Valdez, Adam Bruce Fovent, and Deric Behar

As blockchain and distributed ledger technology (DLT) use cases continue to grow across the broad spectrum of financial markets, the International Swaps and Derivatives Association, Inc. (ISDA) is once again stepping into the crossroads of technology and derivatives with the publication of the ISDA Legal Guidelines for Smart Derivatives Contracts: Foreign Exchange Derivatives (the Guidelines).

The HKMA introduces a new data sharing initiative, reported on the central bank digital currency initiative, and outlined regtech plans.

 By Simon Hawkins, Kieran Donovan, and Kenneth Y.F. Hui

The fifth annual Hong Kong Fintech Week conference kicked off with speeches and panels from both Hong Kong and international regulatory representatives, in addition to key market players. Topics explored ranged from the impact and complications of technology and big data to notable technological trends that have emerged as a result of the pandemic.

A new report explores the advantages, impacts, and approaches the Eurosystem is considering as it contemplates a digital currency.

By Max von Cube

In October 2020, the European Central Bank (ECB) published a Report on a Digital Euro (the Report). The Report sets out the main findings of a task force initiated in early 2020 to investigate the potential for a central bank digital currency (CBDC) in the euro area.

The paper discusses supervision and regulatory issues of cryptocurrencies, and finds that a central bank digital currency in the EU is not (yet) warranted.

By Max von Cube

In May, the European Central Bank’s Crypto-Assets Task Force published a paper on cryptocurrencies such as Bitcoin, Ether, and Ripple (referred to as narrowly defined “crypto-assets”). The paper, titled “Crypto-Assets: Implications for financial stability, monetary policy, and payments and market infrastructures,” follows similar recent publications by the European Banking Authority (EBA)[i] and the European Securities and Markets Authority (ESMA).[ii]

After examining cryptocurrency markets and tracing their linkage to the financial system and the real economy, the authors of the paper found that cryptocurrencies currently do not pose a material risk to financial stability. Further, the authors currently see no direct implications of cryptocurrencies for monetary policy.

Regulatory guidance on cryptoassets and digital currency companies may lead to a legitimisation of crypto-businesses as an investable asset class.

By Stuart Davis, Sam Maxson, David Walker, Tom Evans, and Catherine Campbell

Recent and upcoming regulatory guidance on cryptoassets and the regulation of companies engaged in digital currency, such as issuers, crypto-exchanges, crypto-custodians, crypto-brokers, and other service providers, could help facilitate private equity investment in this space. While there has been some institutional investment in crypto-businesses — such as Goldman Sachs’ investment in Circle (owners of the Poloniex crypto-currency exchange) and Tiger Global’s investment in Coinbase — this has been a relatively nascent market with most money coming in the form of early-stage and venture investing.