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US CBDC moves a step closer with sandbox initiative – Industry roundup: 1 September

Digital Dollar Project sandbox to study CBDC cross-border payments

The Digital Dollar Project (DDP) announced that it will launch its Technical Sandbox Programme in early October to jumpstart further exploration of technical implementations of a US central bank digital currency (CBDC). The inaugural cohort will focus on cross-border payments.

A non-profit venture, the DPP is a partnership between Accenture and the Digital Dollar Foundation to explore the potential advantages of a US CBDC – aka a digital dollar – and how it could be used to enhance monetary policy and provide scalability and security for domestic and international payments.

The Technical Sandbox Programme will offer a “collaborative space” for DDP participants and financial service providers (FSPs) to evaluate the technological, business, and policy approaches to CBDCs in a neutral environment. Participants will examine real-world technology, explore potential implications to business strategies and operations, and experiment to uncover possible use-case specific solutions.

“The launch … marks the next step in our effort to convene the private and public sector in exploration of a CBDC in the US," said Jennifer Lassiter, the DDP’s executive director. “We understand how important it is to include a diverse set of views and expertise as we look to answer key questions about how the technology could work, the problems we hope to solve, and the ultimate business and individual outcomes we want to achieve. The marriage of these sectors in our collaboration is essential and will lay the foundation for robust pilots that improve the outcomes and usability of CBDCs.”

Each cohort of the DDP Technical Sandbox Programme will consist of two phases: an education phase and a pilot phase. In the education phase, partners and participants will develop a business and functional understanding of the technology and evaluate the differences in possible design choices. During the pilot phase, they will identify and test specific CBDC use-case hypotheses with the aim of gathering data on business-level impacts. “The results gathered will be broadly shared and used to inform both private and public sector stakeholders on how advancing technical solutions can unlock business value in a transformative way,” a release stated.

A wide range of industries and technical experts have come together as part of the DDP to “define desired outcomes and explore a wide range of technical design choices,” Lassiter added.

According to reports, participants in the initiative include Knox Networks, EMTECH, and Digital Asset. A further name is real-time gross settlement system operator Ripple, despite its ongoing lawsuit with the US Securities and Exchange Commission (SEC). One report commented: “It is funny that the company will now work on the digital currency of a country where it is being prosecuted.”

Japan regulator to step up bank surveillance

Japan is to step up surveillance of banks’ risk control as interest rises around the world create latent losses in their foreign bond holdings, reflecting concerns about the impact of US monetary tightening on the country's financial system.

The government’s Financial Services Agency (FSA) “will hold dialogues with the banks about control of market risk” as global interest rate rises had caused unrealised losses on their holdings of foreign bonds, the regulator said in its latest annual policy guidelines.

In seeking higher returns than have been available locally, major Japanese banks have invested heavily in foreign bonds, mainly US Treasuries. But when yields rise, as they have done in response to monetary tightening by the US Federal Reserve and other central banks, the value of bonds falls.

The current round of aggressive foreign interest rate rises has caught major Japanese banks off guard, reports suggest. Combined valuation losses on overseas bond holdings at Mitsubishi UFJ Financial Group and two other top banking groups stood at 2.656 trillion yen (JPY) (US$19.12 billion) at the end of June, an increase of more than 50% from three months earlier.

The Bank of Japan (BoJ) has yet to join in the global cycle of interest rate rises, as inflation is still moderate despite an uptick to 2.6% in July and the economy is just starting to recover after tight anti- Covid-19 restrictions.

The financial regulator also said it would encourage major lenders to strengthen their management of risk relating to foreign-currency liquidity, particularly because Japanese banks' market-based currency procurement was vulnerable to sudden market fluctuations. The FSA added that it and the BoJ would conduct stress tests on banks’ risk exposures.

This year's policy guidelines cited a need to address potential issues related to leveraged buyout financing. Prolonged ultra-low interest rates at home are pushing Japan’s major banks to look beyond traditional lending in search of yields.

Japan's Marelli Holdings Co, an auto parts supplier that KKR & Co bought with high leverage, entered a court-led restructuring process in June with more than JPY 1 trillion of debt. That has caused massive losses roughly two dozen creditors, including Mizuho Financial Group.

Brazil’s development bank to purchase carbon credits

Brazil’s National Development Bank (BNDES), which oversees the pioneering climate financing initiative The Amazon Fund, has opened a public tender to purchase up to real (BRL) 100 million (US$19.74 million) in carbon credits.

A webinar was held to outline the entire process – the first such large-scale initiative led by the BNDES – and the bank said further investment rounds could raise the volume of investments to BRL 300 million over the next three years.

The BNDES hopes its moves will kickstart the carbon credit market in Brazil, which the country’s lower house of Congress estimates could attract up to US$72 billion in credit trade with foreign companies.

In May, the BNDES approved a trial project to purchase BRL 10 million in carbon credits. In this inaugural call BRL 8.7 million in credits were acquired from five developer companies: Biofilica Ambipar, Solvi, Sustainable Carbon, Carbonext and Tembici.

The credits were purchased on a forward basis; with the activities reduce or remove CO2 (or other greenhouse gases) that generate the assets are yet to be carried out. The two most significant projects acquired are for forest conservation (known by the acronym Reducing Emissions from Deforestation and Forest Degradation (REDD)), with most carbon credit projects in Brazil coming under this category.

The provisions set out in the public tender rules show that the BNDES is targeting projects that are fully developed and implemented in Brazilian territory and that can demonstrate, according to voluntary certifications standards, their contribution to capturing or reducing greenhouse gas (GHG) emissions, besides generating carbon credits.

A maximum of two proposals submitted by each bidder will be contracted, with a total value of up to BRL 25 million. Interested parties must submit their proposal by 3 October through the bank’s customer portal.

Meanwhile Brazilian aluminium producer Companhia Brasileira de Aluminio and green economy project developer Reservas Votorantim announced that they are issuing Latin America's first carbon credits from the Cerrado biome. The first auction of Cerrado carbon credits starts now and bids can be submitted by the end of September, the companies said.

Issuing carbon credits generated on preserved areas of the Cerrado biome is unprecedented, the statement said. Around 316,000 credits will be generated, covering a period between 2017 and 2021. The Cerrado, where Brazilian farmers grow soybeans and corn for export and local consumption, is being destroyed faster than the neighbouring Amazon rainforest, according to the Worldwide Fund for Nature.

Under Brazil's 2012 forestry code, farmers must conserve 35% of the area on their properties in the Cerrado, and 80% if the farm is on the Amazon biome.

The strengthening of voluntary carbon markets is an important tool to reduce deforestation in Brazil, as they provide a way to compensate farmers who preserve trees even in places where they are permitted to cut them down.

Reservas Votorantim has certified an area covering 11,500 hectares (28,417 acres) in the state of Goias, where it can potentially generate around 50,000 carbon credits per year, according to the statement.

Standard Chartered launches Singapore digital bank

Standard Chartered’s joint venture with an arm of Singapore’s biggest trade union group has launched digital banking services in the city-state, adding to competition in a market where tech giants are also seeking to make their mark.

Trust Bank, in which the UK firm holds 60%, is offering savings accounts, credit cards and insurance products, targeting workers and their families with benefits aimed at cushioning the impact of rising inflation.

Fairprice Group, which runs supermarkets and food courts across the island, holds the remaining stake in the venture along with NTUC Enterprise.

Singapore is the arena for intensifying competition in financial services as contenders such as Jack Ma’s Ant Group and Grab Holdings challenge the area traditionally controlled by lenders led by DBS Group Holdings, the country’s largest. For Standard Chartered, backed by state investor Temasek Holdings, this will be its second digital bank in Asia, following the launch of Mox in Hong Kong two years ago.

The Fairprice Group engages with around one million clients everyday through its various outlets, according to Trust Bank’s Chief Executive Officer Dwaipayan Sadhu. “We should be able to tap into that ecosystem,” Sadhu said at a briefing. The new digital bank will also offer automatic teller machine services primarily via Standard Chartered’s local network, he added.

The Trust Bank launch closely follows a joint venture by Grab and Singapore Telecommunications Ltd., which earlier said their banking app will roll out next week. That group obtained one of two full digital banking licenses in 2020 that allow deposit taking and serve both retail and corporate customers. The other license holder is tech conglomerate Sea Ltd., which has yet to reveal much detail of its plans. Unlike the tech firms, Standard Chartered does not need such a permit because of its banking status.

SWIFT applies predictive analytics to reduce processing errors

SWIFT announced it has introduced a service that applies predictive analytics to cross-border payments data to pre-empt potential errors before a payment is executed.

This solution analyses previous payments transactions conducted over the SWIFT network, on an aggregated and anonymised basis, to identify potential errors in payee details and other trade information that may cause the payment to fail or be processed incorrectly.

It is an extension of SWIFT’s Payment Pre-validation services and is available to banks via application programming interface, or API.

SWIFT indicated that the new service forms part of a wider programme to drive instant, frictionless and interoperable cross-border payments. This will also include steps to include low-value payments through SWIFT Go and wider partnerships with industry firms to support use of tokenisation, artificial intelligence and central bank digital currencies.

SWIFT’s chief innovation officer Thomas Zschach commented: “When someone wants to make an international payment, we can instantly predict the likelihood of success based on whether the account has been credited successfully in the past, and then present this information directly to the customer so that they can fix any errors or typos before the payment even starts its processing.”

SWIFT added that the new service will help to enhance transactional data quality across the payments ecosystem “allowing our clients to experience real benefits with a more seamless payment experience overall.”

Hong Kong’s key borrowing rate hits post-2008 peak

A gauge of Hong Kong’s interbank borrowing costs has risen to its highest level since the 2008 global financial crisis, tracking rising global rates amid expectations of aggressive rate hikes by major central banks. 

The three-month Hong Kong interbank offered rate (Hibor) climbed three basis points to 2.68%, a 14-year high crisis. DBS Bank Ltd., OCBC Wing Hang Bank Ltd and Mizuho Bank Ltd expect the gauge to rise further even after it posted a record 11 straight month of gains.

DBS Bank predicts the three-month Hibor to rise to 2.93% in Q1 2023 and to 3.13% in the following quarter. Higher rates would add to challenges in boosting the city’s economy, which is expected to contract this year for the third time since 2019.

The one-month Hibor, the main reference for Hong Kong mortgage rates, also climbed two basis points to 1.89%. The Hong Kong dollar was steady at 7.8486 against its US counterpart.

Barclays sells remaining Absa stake

Barclays said that it will sell its remaining 7.4% stake in South African bank Absa, completing its exit from the continent after a presence of over 90-years.

The UK bank will sell the 63 million Absa shares to institutional investors via an accelerated bookbuilding, with the pricing yet to be set. In April 2022 Barclays sold a similar sized stake for £526 million (US$611.8 million).

Barclays originally announced that it would sell Absa in 2016, as part of a strategy revamp to focus more on the US and the UK under then-CEO Jes Staley.

Australia regulator lifts Westpac’s add-on liquidity requirement

Australia’s bank regulator said that Westpac Banking Corp is no longer required to keep an additional amount of cash reserve after the company took steps to rectify issues related to the regulator’s liquidity requirements.

In 2020, the Australian Prudential Regulatory Authority (APRA) ordered Westpac to add 10% to the amount of cash it keeps on hand in response to material breaches that demonstrated weaknesses in the bank’s risk management and oversight, risk control framework and risk culture in its liquidity risk management and reporting.

APRA removed the add-on after Westpac completed a programme to meet the regulator’s liquidity standard. The removal of the liquidity add-on is effective 1 September. “The capital requirement add-on of AU$1 billion (US$680 million) to reflect Westpac’s heightened operational risk profile remains in place,” APRA said.

According to Westpac, the removal of the add-on contributes around 13 percentage points to the bank’s liquidity coverage ratio.

Ebury steps up presence in alternative investment

European fintech and global provider of transaction payment solutions Ebury plans to increase its presence in the alternative investment sector to meet the growing demand for better, more focused services as an alternative to traditional banking providers.

The London-based company said that it has invested significantly in its proposition, hiring new specialists in the alternative banking investment sector and creating a dedicated international footprint with colleagues across 10 countries.

Ebury has also developed a new and improved proposition encompassing support for Markets in Financial Instruments Directive (MiFID) compliance, FX risk management, cash management and treasury solutions. “The rebrand of this dedicated division to Ebury Institutional Solutions will support its ambitious growth plans in the market, leveraging its cutting-edge global transaction payment platform to provide a proven full-service offering,” the company said in a release.

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