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Bank of Canada calls central bank digital currencies risky, especially storage

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Canada’s central bank, the Bank of Canada, recently put out a report on the risks and benefits of a central bank digital currency. 

“An anonymous token-based central bank digital currency (CBDC) would pose particular security risks,” the Bank of Canada wrote in its Oct. 5 report. “These risks arise from how balances are aggregated and stored, how CBDC is used for transactions, and how various solutions such as e-wallets, crypto exchanges and banks compete to attract users.”

Over the past year or so, discussions have picked up and various governments have begun digitizing their currencies in the form of a CBDC. China has made a number of headlines for its digital yuan CBDC. 

The Bank of Canada’s report listed risks in multiple areas, including asset storage. In the digital asset world, tokenholders can make a huge number of wallets, spreading their funds in different allotments across those wallets. This leads to more asset storage locations than would be plausible in traditional finance.

Risks also arise from the platforms potentially providing solutions around CBDCs. In response, possible solutions include caps on wallet holdings built into the CBDC, as well as parameters for involved platforms set by the associated central bank.

“If the Bank of Canada were to issue a CBDC, it would likely be token-based,” the report said, noting the presence of secure, albeit clunky, private-key use in the equation. “To ensure that CBDC is a safe and efficient means of payment, the Bank needs to carefully consider how CBDC will be aggregated and used, and what externalities will arise from it.”

The report explained the pros and cons of personal wallets and storage versus centralized asset storage opportunities, such as exchanges, while also mentioning other risks and measures associated with a potential CBDC, as well as possible rules and guidelines around such an asset class.  

Europe also recently headlined CBDC news as the European Central Bank expressed interest in the asset type. 



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New York authorizes first Yen stablecoin operator in the US

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New York has given the first authorization to a stablecoin backed by the Japanese Yen to operate in the U.S.

Per a Dec. 29 announcement, the New York Department of Financial Services has granted Japanese firm GMO-Z.com a charter to handle U.S.D. and Yen-backed stablecoins in New York. 

Given New York’s status as a global center, the NYDFS is the most prominent state financial regulator in the U.S. It is also one of the most aggressive. A pass to operate in New York often opens up the rest of the country. 

GMO’s charter is as a limited liability trust company rather than a full bank, the principle difference being in authorization to handle deposits. While a stablecoin operator typically needs the ability to hold reserves of the pegged asset, GMO’s charter limits its rights to hold other kinds of deposits not central to its ability “to issue, administer, and redeem” its stablecoins. 

The right to issue such non-depository charters has been a bone of contention between state regulators like the NYDFS and national banking regulators in the U.S. 

GMO president and CEO Ken Nakamura said: “We’re breaking ground with our move to issue the first regulated JPY-pegged stablecoin, which many see as a safe haven asset.” 

The NYDFS recently made changes to its famous BitLicense, including a conditional format that buddies up newly licensed firms with existing licensees. The first conditional BitLicense went to PayPal, facilitating the launch of its new crypto services earlier this fall with the help of longstanding licensee Paxos.