Digital Euro Association Blog

Stablecoin and CBDC News Digest, August 2022

The world of digital money moves quickly and is time consuming to keep up to date with. To keep you up to speed with the most important pieces of news that have lasting implications especially for stablecoins and CBDCs, the monthly Stablecoin and CBDC News Digest takes care of it for you.

What happened in the stablecoin space?

Acala stablecoin collapses after exploit.

On August 14th, polkadot project Acala suffered an attack on its stablecoin aUSD. This subsequently lost its US dollar peg and fell 99% to fractions of a cent. The team behind Acala was able to suspend certain operations on the blockchain to prevent the attackers from making off with the funds.

Acala explained the exploit was made possible because of errors in the configuration of a liquidity pool. Hackers were able to mine $1.3 billion worth of aUSD. The attackers have already been able to exchange a small part of this for the ACA token. The team identified a wallet owned by the attackers, which currently holds said aUSD 1.28 billion. By community vote, Acala has suspended trading on the protocol for the time being.

USDT market cap up by $2 billion following Tornado Cash debacle.

The market cap of Tether (USDT) tokens has increased by nearly $2 billion since the U.S. Treasury Department imposed sanctions on cryptocurrency mixer Tornado Cash.

The Office of Foreign Asset Control essentially barred Americans from using Tornado Cash on August 8th, blacklisting 44 USD Coin (USDC) and Ether (ETH) addresses connected to the service. They allege that Tornado Cash was used by individuals and criminal organizations to launder over $7 billion worth of cryptocurrency since 2019.

The market cap for USDC has declined by some $2 billion from highs over the past month to its current capitalization of around $53 billion. The market has noticed the USDC decline with a correlation being drawn between its market cap and the increase in the capitalization of Tether.

Huobi explains short-term decoupling of the in-house stablecoin HUSD.

The HUSD suddenly lost its connection to the US dollar, which meant that the stablecoin was temporarily only at a rate of 0.82 US dollars. The alarm bells immediately went off in the crypto community, because a similar decoupling of the Terra stablecoin a few months ago triggered the domino effect that is still plaguing the crypto industry.

As explained by the HUSD development team, the decoupling was probably triggered by the fact that in some regions the accounts of so-called market makers were closed to comply with legal requirements. However, the time difference and the different working hours in the various regions caused liquidity problems, which ultimately resulted in the depeg. Huobi then assured customers that the issue was fully resolved, however, the platform urges caution due to the volatile market situation.

What happened in the CBDC space?

The European Central Bank working paper outcome

This month, the ECB issued a new edition of its working paper series “The economics of central bank digital currency”. It sought to identify issues and consensus regarding CBDCs, and to identify gaps in the previous research.

Main Conclusions from the “economics of central bank digital currency” paper:

    • The accumulation of payment data and the arising fear of compromised privacy is a complex issue that needs to be addressed.
      The ECB admits to the benefits of anonymous payments but also points out which benefits users receive from non-anonymous payments (e.g., law enforcement, aid for scams, consumer protection).
    • Shrinkage of credit supply followed by a CBDC introduction might not be a likely scenario if banks have market power in retail deposit markets.
      The paper finds that the issuance of a  CBDC would improve competition and increase welfare, making the introduction of a CBDC potentially less disruptive than anticipated.
    • Financial stability implications  following CBDC introduction may be less severe than is often argued.
      This conclusion is drawn from the theoretical model that is part of the paper. While it is true that the risk of bank runs is higher with digital storage of Central Bank money, banks could react by offering more attractive deposit contracts that counter this fragility.
  • There is a sweet spot between too much and too little CBDC adoption.
    Several mechanisms to inhibit both scenarios are enumerated in the paper.
  • “[CBDCs] are the only solution to guarantee a smooth continuation of the current monetary system”
    As physical money loses its economic “fitness” and cryptocurrencies are gaining more adoption, the authors admit to the importance of a CBDC.

The Central Bank of the Russian Federation plans CBDC introduction in 2024.

The digital Ruble is set to be rolled out Russian-wide by 2024 by the Central Bank of the Russian Federation. A prototype of the digital ruble platform was launched in December 2021. The roll out will expand available payment options for merchants via smart contracts, the offline mode is planned to be introduced one year later. The sanction-struck Russia is eager to find ways to omit economic repercussions from Western countries for the invasion on Ukraine.

Thai Central Bank plans CBDC test phase.

The Bank of Thailand released details on its CBDC test phase that is supposed to run until mid 2023. 10.000 retail merchants and 3 corporations are included in the test phase. The focus for the test phase is split the Foundation Track and the innovation track. The former focuses on efficiencies and security aspects and the latter focuses on programmability of the CBDC. To gather ideas for the CBDC, the Bank of Thailand is conducting a CBDC hackathon with the application deadline September 12, 2022.

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