India’s uneven progress towards cashless society

Six years after Prime Minister Narendra Modi abruptly withdrew its highest denomination banknotes, India appears to be further away rather than nearer the government’s goal of a cashless society.

According to the Reserve Bank of India (RBI) data, cash circulation in the Indian economy as of 21 October 21 stood at Rupees 30.88 lakh crore – INR 30.88 trillion or about US$37.74 billion. The RBI had pegged currency with the public at INR 17.77 trillion (US$22 billion) the time of demonetisation on 4 November 2016, when Modi banned INR500 and INR1,000 banknotes, which then constituted 86% of India’s overall currency.

The government said the entire demonetisation exercise, criticised by many economists for poor planning and execution, was aimed at making the Indian economy “cashless”.

Currency in circulation refers to coins and banknotes used by the public to transact, settle and buy goods and services. The figure is calculated by deducting cash from banks from the currency in circulation.

The latest figures suggest that cash circulation in the Indian economy continues to grow at a robust pace despite a boost to contactless digital payments during the Covid-19 pandemic. The overall picture is one of data withdrawals from ATMs remaining largely unchanged since lockdown was lifted and a sharp rise in Unified Payments Interface (UPI) payments – signs of behavioural change even as the amount of currency in circulation rises.

A 2019 RBI study found that “although digital payments have been growing gradually in recent years, both in value and terms of across countries, data also suggests that during the same time currency in circulation to GDP ratio has also increased in consonance with overall economic growth.

“An increase in digital payments to GDP ratio over a period of time does not seem to automatically imply that a fall in the currency to GDP ratio of the country” it added.

However, a recent note by State Bank of India (SBI) economists pointed out that currency in circulation declined by INR 7,600 crore in last month’s Diwali week; the first such drop in almost two decades except for the 2009 festivities, which also saw a marginal decline due to the global financial crisis.

NY Fed official talks up digital dollar

A senior Federal Reserve Bank of New York official says that the bank sees promise in using a central bank digital dollar to speed up settlement time in FX markets.

Michelle Neal, who heads the bank's Markets Group reported that research undertaken by the bank has identified how this type of money could benefit a key part of the financial system, but did not reveal whether anything involving a central bank digital currency (CBDC) was imminent but revealed

Foreign exchange spot transactions "are critical in the context of cross-border payments, and serve as a building block for longer, more complex transactions," Neal told delegates attending a conference in Singapore. She noted that settlement of these trades takes about two days “which leaves some room for improvement.”

The research found that a Fed digital dollar, used in a wholesale capacity, and the technology to record transactions “results in instant and atomic settlement.”

Neal said the research work “indicated that settlement could occur in fewer than 10 seconds on average and that horizontal scaling was possible.”

The Fed has been exploring for some time how it can launch a fully digital dollar, which some have dubbed Fedcoin. Fed leaders have said that any launch of such an asset would need the support of elected leaders.

Neal's comments came as the bank’s Innovation Center released a report on the first phase of its Project Cedar wholesale central bank digital currency (wCBDC), which is intended for use by financial institutions rather than the public. The prototype was able to implement transactions dramatically faster and more securely than the current standard.

A FX spot transaction was chosen as the use case for the 12-week first phase of Project Cedar due to its relative simplicity and the fact that this type of transaction is often used as part of broader, more complex transactions. It also represents a market with US$7 trillion in daily turnover with less than 40% of it settled on a payment-versus-payment basis.

BIS releases latest central bank FX survey

The Bank for International Settlements’ (BIS) recently released its 2022 Triennial Central Bank Survey, which shows that trading in OTC foreign exchange (FX) markets reached US$7.5 trillion per day in April 2022, up by 14% from 2019.

The research report, first published in 1986, appears triennially and is regarded as the most comprehensive source of information on the size and structure of global over the counter (OTC) markets in FX and interest rate derivatives The survey seeks to increase the transparency of OTC markets, helping central banks and market participants monitor global financial markets, and to inform discussions on reforms to OTC markets.

Turnover of FX swaps in 2022 accounts for over half of all global turnover, up from 49% in the previous survey three years ago. The share of spot trades fell to 28% from 30% in 2019, while that of outright forwards was unchanged at 15%. Overall, inter-dealer trading reached 46% of global turnover in April 2022, a higher share than in previous rounds of reporting.

The US dollar (USD) was on one side of 88% of all trades, unchanged from 2019. The share for the euro (EUR) dipped slightly to 31% and those for the yen (JPY) and the pound (GBP) were unchanged at 17% and 13%, respectively. The renminbi’s (RMB) share rose to 7%, making it the fifth most traded currency in 2022, up from eighth place in 2019 with a 4% share.

“FX turnover growth was entirely due to higher inter-dealer activity rather than turnover with customers, with remains largely the same,” commented Patrick McGuire, BIS’s Head of International Banking and Financial Statistics. “Swaps remain the most traded FX instrument. The USD retained its dominant status while the Chinese currency has risen to become the fifth most traded currency.

“Trading in five jurisdictions including the United Kingdom, the United States, Hong Kong Special Administrative Region (SAR), Singapore and Japan represented over three quarters of all FX trading noting trading activity in the United States and Singapore grew by more than the global average.”

PayPal and Venmo support Apple’s Tap to Pay

PayPal has confirmed in its Q3 2022 earnings report that, together with US mobile payment service Venmo, it will support Apple’s Tap to Pay on iPhones.

A release noted that having this option implemented as part of their tech offering will enable merchants to accept both contactless card payments and payments made via Apple Pay, or other digital wallets, such as Google Pay. Through this, merchants are given varied options of apps and services to choose from for payments’ acceptance.

Apple launched the Tap to Pay feature on iPhone in partnership with Stripe last February. It enables merchants to accept payments without needing any additional hardware, something that will be done through Venmo and PayPal as well. 

PayPal, which is working several separate Apple-related programmes apart from Tap to Pay, said that Apple Pay will be added as a payment option for its unbranded checkout flows on merchant platforms, including the PayPal Commerce Platform. In addition, US based consumers will be enabled to have PayPal and Venmo network-branded credit cards loaded to the Apple Wallet and used with Apple Pay in 2023.

SEC wants improved liquidity management for open-end funds

Better Markets, the US non-profit organisation set up in the wake of the 2008 financial crisis to promote the public interest in the financial markets, is among those welcoming the Securities and Exchange Commission’s (SEC) proposed regulation to protect investors and financial stability by improving liquidity management and implementing swing pricing for open-end funds.

The SEC last week issued proposed amendments to Rule 22e-4 and Rule 22c-1 of the Investment Company Act of 1940 that would require open-end funds to adjust their approach to liquidity risk management. In particular, the proposed amendments would mandate swing pricing and a “hard close” on most open-end funds and would amend certain components of open-end funds’ liquidity risk management programmes.

Key aspects of the proposed amendments include:

• Required Use of Swing Pricing. All open-end funds (other than exchange traded funds (ETFs) and money market funds (MMFs)) would be required to adjust their net asset values during any period of net redemptions, as well as during periods of net purchases exceeding a specified threshold.

• Mandatory Hard Close. An investor’s order to purchase and sell an open-end fund (excepting ETFs and MMFs) would only be eligible for that day’s net asset value if the fund, its transfer agent or a registered clearing agency receives the order before the time the fund calculates its net asset value (typically 4 pm ET for most funds).

• Amendments to Fund Liquidity Risk Management Programs. Among other changes, the proposed amendments would require funds to incorporate stress into their liquidity classifications by assuming the sale of a stressed trade size. The proposal would also amend the current liquidity classification system by eliminating the “less liquid” category and by requiring daily, rather than monthly, liquidity calculations. The proposed amendments would require funds to maintain a minimum amount of highly liquid assets of at least 10% of net assets.

• Form N-PORT Reporting Frequency. Funds would be required to file Form N-PORT on a monthly basis within 30 days after month-end.

The comment period for the proposed amendments is 60 days after publication in the Federal Register.

“Business as usual” the message as Hong Kong hosts business conference

Global executives want to see a further easing of Hong Kong's Covid-19 restrictions and it’s crucial for the China border to reopen so the financial hub can reconnect with the mainland, says Eddie Yue, chief executive of the Hong Kong Monetary Authority (HKMA).

Yue was interviewed by Reuters last week as the city state hosted some of the world's top banking bosses at a business conference aimed at restoring Hong Kong’s status as a premier financial centre. The message promoted during the three-day Global Financial Leaders' Investment Summit was that it is “business as usual” in Hong Kong, despite the slow progress in reopening opening its borders to corporate and leisure travel.

The event, led by the HKMA, kicked off informally on 1 November with a closed-door meeting between some invited bankers and the city’s financial officials at the office of the de facto central bank. It attracted 250 financiers from 120 global firms, half of whom flew in from abroad, which according to its Chief Executive John Lee Ka-chiu demonstrates that “Hong Kong is back” and once more open for business.

During the event, Yue spoke on the city’s currency peg to the US dollar and said that while there was no intention to change the peg, there were always contingency plans.

Separately, Bloomberg reports that the number of visas granted to overseas workers in Hong Kong fell by about two-thirds during the pandemic, as stringent travel curbs severed the finance hub’s connection with the rest of the world. Around 13,800 general employment visas were approved in 2021, compared to more than 41,000 two years earlier, according to statistics from the city’s Immigration Department.

Singapore and Thai currencies vulnerable as yuan slumps

Investors in the Singapore dollar (SGD) and Thai baht (THB) are most vulnerable to potential losses if the Chinese yuan (CNY), the worst-performing Asian currency so far this week, continues its fall against the US dollar as the country continues with its strict zero-Covid zero approach, says Bloomberg.

It observes that currencies have the highest three-month daily correlation with the offshore Chinese yuan in emerging Asia, signalling a further drag from extended weakness in the Chinese currency. The People’s Bank of China’s (PBoC) move yesterday to end its string of stronger-than-expected yuan fixings that had been in place since August has traders betting that Beijing is reducing its support for its currency.

Onshore and offshore yuan fell the most among peers in Asia following the last weekend’s pledge by Chinese health officials to “unswervingly” stick to a zero-Covid approach. Singapore’s open and export-oriented economy will be impacted by a slowdown in the Chinese economy says Bloomberg, while the lack of Chinese tourists will weigh on the baht, as they contributed around 20% to its economy pre-pandemic.

Standard Chartered’s crypto arm plans Abu Dhabi office in 2023

Standard Chartered’s crypto spinoff Zodia Markets is planning to expand into Abu Dhabi next year according to reports, making the emirate its first outpost in the Middle East and Africa as it targets growth across the regions. The United Arab Emirates (UAE) is the fifth-largest crypto market in the Middle East.

Zodia Markets has drafted an application to operate in Abu Dhabi but plans to submit a new one in early 2023 after extended talks with regulators, who are said to be keen to reap the benefits of slow progress by the US, UK and Europe in policing crypto.

Established in June 2021, Zodia Markets is a partnership between SC Ventures, Standard Chartered’s fintech investment and ventures arm, and BC Technology Group, parent of Hong Kong Securities and Futures Commission (SFC)-licensed digital-asset platform, OSL. At the end of June 2022, it secured cryptoasset approval from the UK’s financial watchdog the Financial Conduct Authority (FCA).