Europe Moves Toward CBDC As Asia Focuses On Digital Asset Rules

EU Commission takes the next step on digital euro while Asian countries set out new rules and frameworks for virtual assets

Flags fly in front of the European Commission headquarters in Brussels. Flags fly in front of the European Commission headquarters in Brussels.

Compiled by the Oliver Wyman Forum

The European Commission proposed legislation to provide a framework for a digital euro should the European Central Bank (ECB) choose to launch one. This is the latest evidence of growing interest in central bank digital currencies (CBDCs) around the world. Meanwhile, several Asian countries tightened rules for cryptocurrency markets and refined strategies for developing blockchain-based financial services. These are among the notable recent developments in the future of money.

Policy Front

EU Proposes Legal Framework For A Potential Digital Euro

The European Commission, the executive agency of the European Union, on June 28 proposed legislation to establish a legal framework for a digital euro that would serve as a complement to cash, not a replacement.

The proposal marks the clearest political signal yet that the EU is edging closer to the creation of a central bank digital currency, or CBDC, for the 20 member states that use the euro. Such a currency would help guarantee the EU’s monetary sovereignty even as other countries consider their own CBDCs and private firms promote the wider use of stablecoins, the Commission said.

The ultimate decision rests with the European Central Bank, which will decide in October whether to begin development work. Fabio Panetta, the ECB executive board member who chairs the central bank’s digital euro task force, said the legislative proposal “is key to ensuring that the digital euro brings value to the people.” 

The proposal calls for the digital euro to be legal tender for both online and offline uses, with the latter offering a greater degree of privacy than existing means of digital payment. It should not be programmable but should be compatible with private digital payment services. Basic digital euro services would be provided free of charge to individuals and would not require them to have a bank account. A separate legislative proposal would require member states to ensure that cash is widely available and accepted for payments, reflecting a Commission survey finding that 60% of people would like the option of continuing to use cash.

Report Urges UK Action On Securities Tokenization

The United Kingdom can become a leader in securities tokenization if the authorities provide legal and regulatory certainty, and work with industry and other governments to develop standards that foster interoperability, according to a joint report by industry group UK Finance and Oliver Wyman, released on July 6.

The report, Unlocking The Power Of Securities Tokenisation, says the UK lags some jurisdictions in issuing tokenized securities but can catch up because the market is nascent. The UK also has an opportunity to build a critical mass of liquidity in secondary markets.

To seize that opportunity, the report calls on the UK Treasury to enable innovation by ensuring its planned financial market infrastructure Sandbox promotes experimentation on the most pressing use cases, and then working with Parliament, the Bank of England, and regulatory bodies to provide legal and regulatory clarity over issues such as collateral regulations and capital requirements. The authorities also should support industry participants in developing standards and potentially shared infrastructure for tokenised securities. And the government should collaborate with other jurisdictions to foster supranational standards.

“Establishing the UK as a leader in the tokenization of the capital markets must be a key imperative to protect our international competitiveness as a global financial center,” said Bob Wigley, chairman of UK Finance.

CBDC Interest Grows As IMF Cites Benefits

The number of countries actively considering the development of central bank digital currencies continued to grow in the first half of 2023, according to the Atlantic Council’s CBDC Tracker.

The tracker showed that 109 jurisdictions were researching, developing, piloting, or had launched CBDCs as of June 30, up from 96 at the end of 2022. The council said 19 of the G20 countries were now in an advanced stage of CBDC development, with nine – including China – having already launched pilots.

Meanwhile, on June 22, senior officials of the International Monetary Fund said well-designed CBDCs could lower remittance costs and improve financial stability, but slow take-up of existing CBDCs in the Bahamas and the Eastern Caribbean Currency Union showed the need to raise public awareness and invest in robust infrastructure. In a blog, the officials noted the relatively high use of cryptocurrencies in the region and called on authorities to focus on promoting transparency and regulation and addressing citizens’ needs for digital payments rather than banning crypto, an approach they said, “may not be effective in the long run.” 

South Korea Enacts Broad Digital Asset Rules

South Korea’s National Assembly on June 30 passed a Virtual Asset User Protection Act that sets customer protection requirements for service providers and imposes penalties for activities such as using undisclosed information and market manipulation.

The law defines digital assets and requires service providers to segregate user assets, have insurance, hold some reserves in cold wallets, and maintain records of all transactions, Coindesk reported. It gives the Financial Services Commission authority to oversee and inspect service providers and gives the Bank of Korea the right to request data from service providers. Violations are subject to imprisonment or major fines, with the Commission able to impose penalties of twice the profits made from unfair trading.

The legislation follows heightened scrutiny of cryptocurrency markets in the country following the more than $40 billion collapse of the Terra-Luna stablecoin system in May 2022. South Korean authorities have an arrest warrant outstanding for Terraform Labs founder Do Kwon for allegedly violating the country’s capital markets law with the stablecoin system.

Singapore Proposes Framework For Digital Asset Networks

The Monetary Authority of Singapore (MAS) on June 26 proposed a framework for designing open, interoperable networks for digital assets, including tokenized assets, and announced an expansion of its Project Guardian to conduct pilot projects in asset and wealth management, fixed income, and foreign exchange.

The central bank’s framework, contained in a report developed with experts at the Bank for International Settlements’ Committee on Payments and Market Infrastructure, reviews design options for enabling the trading of digital assets across various networks and liquidity pools, such as whether to use a public or private network and allow participation on a permissioned or permissionless basis. It then explores how existing Principles for Financial Market Infrastructure (PFMI) developed by the BIS and the International Organization of Securities Commissions (IOSCO) might apply to those digital networks in areas like credit and liquidity risk management and settlement.

The report urged collaboration between the public and private sectors globally to promote best practices and standards, and prevent market fragmentation as digital assets proliferate.

MAS also announced an expansion of Project Guardian in which 11 global financial institutions will conduct test pilots of tokenized asset and wealth management products, asset-backed securities, tokenized bonds, and bank liabilities. The initiatives build on an initial Guardian pilot that carried out transactions involving tokenized deposits and government bonds on a public blockchain with logic adapted from decentralized finance (DeFi) protocols.

Singapore Prohibits Crypto Staking And Lending

The Monetary Authority of Singapore (MAS) on July 3 proposed a number of investor protection measures covering digital assets and said it would prohibit the offering of crypto lending and staking services to retail customers.

The central bank’s proposed measures would require service providers to segregate customer assets from their own funds, ensure that custody is operationally independent from other business units, and provide clear disclosures to customers of their risks involved in having assets held by the service provider, among other things. The central bank plans to implement the measures by October subject to a one-month comment period ending in August.

In the meantime, the MAS said it would implement the ban on facilitating lending or staking services for retail customers as those activities “are generally not suitable for retail public.”

Hong Kong Creates Task Force To Promote Web3 Development

The Hong Kong government on June 30 announced the creation of a task force to promote the development of a Web3 ecosystem for virtual assets.

Financial Secretary Paul Chan Mo-po, who will chair the task force, cited the potential for blockchain technology to enhance the security and transparency of financial transactions at lower cost. “It has the potential to solve many difficulties and pain points encountered in finance, trade, business operations and even day-to-day life,” he said in a statement. The task force is the latest in a series of recent measures authorities have taken to encourage digital asset activities.

Business Developments

SEC Reportedly Sees Recent Bitcoin ETF Filings As Inadequate

A wave of recent filings by asset managers seeking to launch spot Bitcoin exchange-traded funds (ETFs) are inadequate, the Wall Street Journal reported on June 30, citing people familiar with the matter. Several of the firms seeking regulatory approval updated their filings in the wake of the report.

The iShares subsidiary of BlackRock, the world’s largest fund manager, fueled hopes for a breakthrough on Bitcoin ETFs on June 15 when it filed for regulatory approval of such a fund with the US Securities and Exchange Commission (SEC). That move sparked similar filings several other fund managers.

However, the agency informed Nasdaq and CBOE Global Markets, which filed applications on behalf of the managers, that the filings were not sufficiently clear and comprehensive, and didn’t name the spot Bitcoin exchange with which they expected to have a surveillance-sharing agreement, the Journal reported.

On June 29, Nasdaq amended its filing on behalf of iShares to say it had reached an agreement with Coinbase to enter into a surveillance-sharing agreement for its planned spot Bitcoin ETF. On June 30, CBOE Global Markets amended applications for funds sponsored by Fidelity, Invesco, Wisdom Tree, and VanEck to say it expected to have surveillance agreements with Coinbase. 

Until now the SEC has rejected all applications for spot Bitcoin ETFs on the grounds that they were vulnerable to fraud and market manipulation and didn’t provide for surveillance agreements.

Gemini Tells Digital Currency Group To Repay Funds Or Face Suit

Cryptocurrency exchange Gemini told Digital Currency Group (DCG) to agree to repay debts of $1.47 billion stemming from two major crypto failures in 2022 or face a lawsuit.

In an open letter on Twitter, Gemini co-founder Cameron Winklevoss said the demand represented “the floor” that creditors of DCG’s Genesis Global Trading subsidiary would accept to support a restructuring of the firm.

Genesis halted redemptions in November 2022 and filed for bankruptcy protection in January 2023 because of losses it suffered from the collapse of hedge fund Three Arrows Capital in July 2022 and crypto exchange FTX in November of that year. Gemini, which used Genesis as a partner on its crypto yield product, is seeking the return of $1.2 billion of client assets stuck in Genesis.