This period of December is usually the period also where the next year’s market outlook reports come out and a good time to catch up on reading. I managed to read three good reports from Coinbase, Messari and The Block. There is simply too much to say about what’s in the reports, but I found ERC-4337 particularly meaningful.

ERC-4337

ERC-4337 looks to enable account abstraction. It looks to be a promising upgrade to Ethereum and makes it easier for enterprises to adopt public blockchains. One of the key problems that we faced at Zilliqa was: who pays for the gas? If the corporate customer is convinced of the benefits of blockchain technology, they may still encounter difficulties when it comes to handling the actual token. Specifically, they may not know who will be responsible for managing the token on their end. They usually prefer not to handle the token themselves in order to avoid the financial and cyber risks associated with holding the token to pay for gas fees.

JP Morgan and Apollo recently used Biconomy's Paymaster for their account abstraction service in the Project Guardian pilot focused on alternative investment tokenization. You can learn more about Biconomy's Paymaster here. This could be the way forward for an important element of how corporates can utilize public chains without having to handle gas payments themselves.

Bitcoin ETF

The big news now, of course, is the Bitcoin ETF, with BlackRock’s application especially. Personally, I am leaning towards the more bullish camp. I believe that it is impossible for all the potential demand to be fully priced in. If the ETF is approved, it will not just be a 0 to 1 moment for BTC; it will actually be a -1 to 1 moment for BTC. Currently, Bitcoin is seen as a speculative asset, but if the ETF is approved, it could become a fundamental part of one's portfolio, much like gold. Incentives are very powerful. If there is money to be made in selling BTC ETFs, you can bet investment advisors will do it. Right now they can’t. With a BTC ETF they can. It really is the watershed moment for BTC this week.

Book is finally out

In other news, “Decentralizing Finance” is now available on Amazon (Hardcover and Kindle) and major bookstores. I'm pleased with the result, which really could only have been achieved with a tier 1 publisher like Wiley. There’s a lot to writing and publishing a non-fiction book. When I have more time I will finish up a post about the process and journey.

I’ve been asked a few times about how relevant the information is, given the fast-moving nature of DeFi. I give it a year. By 2025 I will need to think about updating the book with possibly a 2nd edition. Nonetheless much of the material is fundamental in nature and the structure (eg. how the chapters are organised) will likely hold constant for years to come.

I have also been informed by Wiley that the book will be made into an audiobook, with an estimated release date around March. It will be available on major audiobook platforms, including Audible, Apple Books, Spotify, Google, and Audiobooks<dot>com.

CFTC

The CFTC has released a comprehensive report on Decentralized Finance. You can find the report here. As one of the major regulators in the US, this demonstrates ongoing regulatory scrutiny and awareness of the crypto and DeFi space. It is also encouraging to see that they recognize the benefits and maintain engagement with the industry. As mentioned before in one of the newsletters I think CFTC’s approach harmonises with the recommendations of the CCI on DeFi regulation.

One observation on page 14 is that none of the members of the Subcommittee on Digital Assets and Blockchain Technology are represented by DeFi protocols. Instead, the subcommittee is comprised of representatives from CeFi. To better align their policies on engagement, it would be beneficial to include representatives from Uniswap, Aave, and other DeFi protocols on their subcommittee.

Podcast on Blockhead

One other media appearance I had before the close of last year was on a podcast with Blockhead, a Singaporean crypto media company spun off from Rice Media. The podcast episode, titled 2023 Round-Up: A Wild Year in Crypto ft. Kenneth Bok, featured discussions on notable events in the crypto industry from the previous year.

During the podcast, I discussed topics such as the SEC's aggressive enforcement actions against crypto exchanges, the increasing institutional adoption of cryptocurrencies, and the developments in stablecoins in 2023. The conversation was hosted by Tim Han and Tim Misir.

Conclusion

I'm working on a course based on the book and looking to do more speaking engagements at various venues. If you haven’t already, please consider buying a copy of the book. You can see a sample of the contents here. S$40 is the price of lunch these days. The book is a summary of numerous reports on DeFi and DLT, combined with my own insights and observations over the years. It is designed as a practitioner's handbook, providing practitioners with the necessary knowledge to upskill themselves quickly without having to read hundreds of reports. Will be most happy to sign your copy also.

Signing off. Have a good week!

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Before delving further into the details of the SFF, I would like to highlight an article I wrote about DeFi regulation based on the CCI DeFi regulation framework. I believe it is one of the most well-articulated and sensible pieces on how to regulate DeFi, coming from institutions like a16z that have the necessary legal and technological insights, as they back CCI.

Special thanks to

• Latham and Watkins for a wonderful dinner, it was great to reconnect with colleagues in the industry and make new acquaintances. Thank you Simon Hawkins and Andrew Moyle for hosting.

• Sygnum for another dinner, was great to finally meet Gerald Goh and Mathias Imbach in person. Thank you Jennifer Lewis for the invite.

• Prof Heng Wang from SMU for inviting me to the SMU one-day conference. Very insightful.

• CFTE for the SFF ticket!

I have been attending SFF since 2017, and it has been improving every year. The panels are consistently insightful and interesting, the booths offer a chance to gain a better understanding of the industry, and it's always a pleasure to connect with colleagues in the field. FinTech is a vast industry, and at times, the possibilities for exploring one's interests can seem endless.

SFF, of course, is more than just tokenization and DLT. AI is a big area which is really revolutionizing FinTech both on the customer-facing side and the way developers work. GitHub had a booth showcasing Copilot, which I have been tinkering with myself. As an hobbyist programmer, I must say it is nothing short of revolutionary. I managed to get some little projects such as a AMM monitoring script working in a few minutes with the help of Copilot. I can’t imagine what it can do in the hands of skilled programmers.

But let's shift our focus to digital assets. MAS has made several announcements regarding Project Guardian and Project Orchid, both of which play a significant role in the tokenization movement. Project Guardian serves as an umbrella project for asset tokenization and institutional DeFi, while Project Orchid is a progressive initiative that specifically focuses on programmable money.

Project Guardian and Asset Tokenization

The Guardian announcements are significant. They demonstrate the forward-thinking culture of the MAS and its willingness to experiment in collaboration with commercial banks. Let’s talk through four of the main points:

• ‘Global Layer One’ (GL1) initiative

• Buy-side Asset Tokenization Projects

• More pilots

• Involvement of more policymakers

Global Layer One Initiative

In a panel featuring Alan Lim (MAS), Umar Farooq (JPM), Caroline Butler (BNY Mellon), Tommaso Mancini-Griffoli (IMF), Dr. Christoph Puhr (UBS), and Masashi Watanabe (MUFG), the GL1 was discussed.

What is the GL1? The MAS release states:

MAS is collaborating with international policymakers and FIs including BNY Mellon, DBS, JP Morgan and MUFG to explore the design of an open, digital infrastructure that will host tokenised financial assets and applications. This new initiative, called Global Layer One (GL1), will facilitate seamless cross-border transactions and enable tokenised assets to be traded across global liquidity pools, while meeting relevant regulatory requirements and guidelines. The participation of public-private stakeholders will help ensure that foundational digital infrastructures are established in accordance with international standards.

Based on what was mentioned during the panel, it can be described as a blockchain designed specifically for banks and financial institutions. It seems to find a middle ground between a fully-permissioned blockchain (controlled by specific financial institutions for their internal purposes) and a public blockchain such as Ethereum.

The name of the project provides a clue. For those who are unfamiliar, public blockchains like Ethereum are commonly known as "layer ones". This aligns with the goals of Guardian, which has publicly emphasized the importance of open networks.

JPM's Umar Farooq made some clear points:

• He doesn't see large transactions using public blockchains as feasible, stating "Sending 100 million to another bank on a public blockchain where no one is accountable is not feasible."

• He is skeptical about bridges, referencing the Wormhole hack in the crypto world.

• He highlights the challenges of integrating different blockchains.

In my opinion, this initiative could be very significant. It would be logical for it to be Ethereum-based, considering that Onyx already runs on permissioned Ethereum.

Who will be allowed to build apps on GL1? 🤔

It's worth noting that the concept of 'one ledger to run them all' has also been discussed in relation to the Regulated Liability Network and the BIS's 'Unified Ledger'.

The "Interlinked Network Model" (INM) initiative launched by the MAS appears to be more focused on ensuring that multiple blockchains work together. The INM whitepaper explores interoperability, examining various bridge models, standards, and legal and compliance considerations.

Buy-side Asset Tokenization Projects

The history of asset tokenization has mostly focused on the sell-side. For instance, in Singapore, several security token platforms can assist companies in raising capital through tokenized securities. Additionally, they enable tokenization of current private equity holdings and facilitate secondary trades.

There were a few announcements during SFF regarding buy-side tokenization, with asset managers as the primary users. I believe that this indicates a greater level of maturity in asset tokenization as a whole.

JPM and Apollo (one of the largest alternative asset management companies in the world, with AUM ~$500B) announced ‘Crescendo’, a project around portfolio management of tokenized securities, which allows for better discretionary management of tokenized alternative assets. (Alternative assets being broadly defined as non-publicly traded equities and bonds)

The main concept revolves around using tokenization to improve access to alternative investments and streamline portfolio management. Currently, access to alternative investments is primarily limited to sophisticated investors. Incorporating alternative assets into portfolios can boost returns, enhance diversification, and reduce volatility. Tokenization enables smooth portfolio rebalancing, in real time and at scale, by integrating public and alternative assets.

The project also involved other blockchain service providers such as Provenance Blockchain, Ava Labs, Oasis Pro, Axelar, Layer Zero and Biconomy.

The MAS has also announced a "new funds workstream" that focuses on the native issuance of Variable Capital Company (VCC) funds on digital asset networks (presumably DLT). The workstream aims to address tax, policy and legal considerations while increasing distribution channels for asset managers.

More pilots

The Guardian announcement revealed several pilots involving multiple financial institutions:

Citi, T. Rowe Price Associates, Inc., and Fidelity International are testing institutional-grade mechanisms to price and execute bilateral digital asset trades efficiently. They are also exploring real-time post-trade reporting and analytics for digital asset trades.

BNY Mellon and OCBC are trialing a cross-border FX payment solution that enables secure and interoperable payment solutions across heterogeneous networks.

Ant International is trialing a treasury management solution to enhance global liquidity management funding. This solution enables real-time multi-currency clearing and settlement through their global treasury center in Singapore, which supports over 40 currencies.

Franklin Templeton is exploring the issuance of a tokenized money market fund through a Variable Capital Company (VCC) structure. This structure utilizes digital asset networks to maintain records of fund shares.

J.P. Morgan and Apollo are collaborating on the use of digital assets to enable more seamless investment and management of discretionary portfolios and alternative assets, as mentioned earlier.

Involvement of more policymakers

MAS had previously announced the formation of a Project Guardian policymaker group, comprising regulators from Japan, Switzerland, and the UK in October. During this SFF, it was announced that the IMF would also be joining the Project Guardian policymaker group.

Therefore, indications suggest that asset tokenization is gaining momentum.

Project Orchid

To recap, Project Orchid is about Purpose-Bound Money (PBM), which was announced at the previous SFF. PBM focuses on the programmability of money, regardless of whether it is in the form of a central bank digital currency (CBDC), stablecoin, or deposit token.

This year saw more pilots under the Project Orchid umbrella:

• Amazon: Escrow for eCommerce

• UOB - OCBC: Fungibility trial for Digital Singapore Dollar

• JPM: Institutional PBM with payment controls for deposit tokens

• UOB - Grab - StraitsX: Singapore Pitstop Pack

The MAS had also released Orchid Blueprint, which details ‘the infrastructure for the safe and innovative use of digital money in Singapore’.

As I sat through the various presentations, I couldn't help but feel that something significant is happening in Singapore regarding programmable money. To my knowledge, no other jurisdiction is carrying out pilots with programmable money on such a large scale. I daresay, Singapore’s concentration of crypto companies and talent has translated into the regulated side, validating the Crypto - Fiat Innovation Dialectic. ☯️

Stablecoin vs Tokenized Deposit Debate

One of the highlights of SFF for me was the debate on Stablecoins vs Tokenized Deposits, which I understand had a previous round at the Point Zero Forum. The panel consisted of:

Team Crypto

• Dante Disparte (Circle)

• Rich Teo (Paxos)

• Staci Warden (Algorand)

Team Banking

• Umar Farooq (JPM)

• Caroline Butler (BNY Mellon)

• Dr. Anna-Naomi Bandi-Lang (UBS)

The debate was moderated by Jo Yeo (MAS).

I thought it was an excellent debate with many of the important points in this discussion raised. The motion was ”Stablecoins, and not tokenised deposits, are better positioned to unlock economic opportunities and uplift financial inclusion”.

To summarise:

Team Crypto (Stablecoins)

1. Safety Over Banks: Team Crypto asserts that stablecoins could be safer than banks, especially if given access to clearing accounts with central banks. They argue that deposits are kept safe in bankruptcy-remote entities. The current system forces stablecoin issuers to rely on commercial banks, leading to vulnerabilities as seen in the SVB case.

2. Utility in Crisis Situations: Stablecoins have proven to be useful in situations where traditional banking systems fail, such as fundraising during the Ukraine crisis.

3. Operational Advantages Over Banks: Lower transaction costs for cross-border transactions and non-stop operation, including during holidays. In contrast to the traditional banking system which doesn’t operate 24/7.

4. Accessibility and Financial Inclusion: They advocate for the inclusive nature of stablecoins, useful in regions with limited banking access or hyperinflation.

Team Banking (Tokenized Deposits)

1. Stability and Safety: Emphasize the stability and safety of tokenized deposits, supported by the established regulatory frameworks and experience of traditional banking. They cite a recent Moody’s report that claims 609 depegs in large cap stablecoins in 2023.

2. Risk Management and Trust: Focus on banks' risk management capabilities, their history of handling crises, and the trust built in the banking system.

3. Regulatory Compliance: Argue for the importance of regulatory compliance in banking, including KYC and AML standards.

4. Financial Inclusion Through Traditional Banking: Contend that financial inclusion can be achieved through banking systems, as evidenced by projects like Aadhar / UPI in India.

An audience poll was taken to determine the winner: Team Crypto. Given that financial inclusion was the motion, this is not totally surprising. I believe we can foresee a future where CBDCs, tokenized deposits, and stablecoins coexist, each serving distinct use-cases.

IMF MD’s Kristalina Georgieva strong opening on CBDC

In a sign of things to come, IMF MD Kristalina Georgieva opened the conference by announcing the launch of a CBDC handbook from the IMF, and that ‘now is not the time to turn back’ on CBDCs. Quite frankly, I don’t think the majority of the audience even knew what CBDCs were.

Other observations

Not many crypto booths / exchanges from 2022. Must be the crypto winter or policy shift.

That’s it for this week’s newsletter! Let me know if you attended SFF and what your thoughts were.

In this newsletter, we’re focusing on stablecoins, a key part of DeFi that allows easy participation in decentralized finance. Stablecoins are cryptocurrencies designed to keep their value consistent by being pegged to a stable asset, like fiat money. This feature is what makes them a smart choice for anyone looking to get involved in DeFi with less risk of volatility.

Although I covered them in the context of Infrastructure and Instruments in my book (Chapter 2), they could have easily been a topic of their own. Stablecoins play a significant role in the future of money. As I mentioned in the previous newsletter, I envision the future of money as a competition between stablecoins, CBDCs, and tokenized deposits. However, since central banks are unlikely to take on private sector roles, the real battle is between stablecoins and tokenized deposits. The upcoming SFF features a discussion on this very topic.

Stablecoins can mean many different things

I should also point out here the wide usage of the term stablecoin. I can think of 5 different ‘stablecoins’ who have vastly different properties:

• USDC (Regulated)

• USDT (Unregulated)

• UST (and other algorithmic, unbacked unstablecoins)

• Japanese Stablecoins (First G7 nation with stablecoin laws, backed by banks)

• Libra (Now history, but significant as precedent and catalyst)

Legislation is starting to catch up by requiring stablecoins to meet minimum standards and disclose relevant information. This is crucial for consumer protection, so that we can avoid another incident like UST. Newcomers may mistakenly assume that all stablecoins are the same at first glance, without realizing the possibility of unexpected collapse for a particular stablecoin.

The price history of a stablecoin is just one factor of stability. Similar to a sheet of ice, failure can occur suddenly and have catastrophic consequences. It is critical to examine the internal composition of a stablecoin and its issuer to assess stability. Without requirements on the issuer by a supervisory body, issuers will have no impetus to disclose internal workings.

You can try it yourself today without being a degen

One exercise I suggest in my book on how people can get started with DeFi is to purchase some USDC (or if you live in Singapore, XSGD). Once you have stablecoins, you can begin exploring the crypto system, using them to pay people and understand the intricacies involved with self-custody. This will involve safekeeping a private key and understanding the distinctions between browser and app-based hot wallets such as Metamask, Trust Wallet, and hardware wallets like Ledger. To become familiar with the system, the best approach is to interact with it directly. Opting for stablecoins instead of volatile cryptoassets not only provides a safer option but also offers the convenience of being able to make payments to individuals and businesses using stablecoins.

Starting from February 2024 when my physical book is out, I will accept XSGD and USDC as payment for my book. When I can physically meet people and sell my book in person, you will be able to pay me with XSGD or USDC, providing a real-world use case.

USDC vs USDT: Comparing the two largest stablecoins

In my book, I covered the business model of stablecoins, how they work, and the major players, such as USDC and USDT. These stablecoins have varying levels of risk. For USDT, regulation is seen as a bug, whereas for USDC, regulation is considered a feature. USDT is often likened to the ultimate eurodollar.

The term "Eurodollar" refers to a dollar that circulates outside the United States. This term has its origins in historical reasons often observed in finance. USDT, being beyond the control of the United States government, offers the advantage of businesses preferring transactions that cannot be censored by the US government. In contrast, USDC has the ability to freeze your assets if required by NYDFS (or other regulator), as stated in its Access Denial Policy.

The ill-fated collapse of SVB in March 2023 is the most significant incident in 2023 for stablecoins, causing migration from USDC into USDT. Circle had 8% of collateral in SVB, causing a depeg of USDC to a low of 0.86. It highlighted the interconnectedness of the traditional banking system with stablecoins.

As the diagram illustrates, the circulation of USDT (yes, the unregulated one) has always been higher than USDC. But this became even more so post-SVB. This should tell you somewhat about the motivations behind the users.

Mechanisms

When I was an ETF trader, a common workflow was to create or redeem ETFs. To create ETFs, bring a basket of stocks. Redeeming converts ETFs back into the basket. A similar process exists with stablecoins. When you bring a dollar to Circle to mint USDC, Circle holds the balance and creates a USDC. Conversely, when you bring the USDC back to Circle to redeem your dollar, the USDC is destroyed. This process is straightforward.

Now, the other part of the stablecoin issue is how they generate revenue. Stablecoin issuers do not pay interest on deposits. Circle earns money by investing in fixed income instruments such as treasury bills and other liquid fixed income instruments. The profit is derived from the interest earned on these investments, as well as the interest earned on the collateral used for its float. This is the main profit model for stable coin issuance. There can be other routes to monetisation, via partnerships for example.

Stablecoins vs Tokenized Deposits

As mentioned in my previous newsletter, the JP Morgan paper raised the topic of collateral. What kind of collateral? These assets must be safe and liquid. By "liquid," we mean that these instruments have deep markets, and can be easily bought and sold without incurring significant spreads. Collectively, they are called High Quality Liquid Assets, HQLA.

This diagram from JPM illustrates the types of HQLA: T-bills, reverse repos, corporate bonds and money market funds (MMFs). It tend goes on to compare the amount of stablecoin reserves invested in the asset, the average daily trading volume of the asset, and the outstanding volume of the asset.

At times of stress (read: panic), there will be large redemptions. This can cause liquidation of HQLA and thus impact the broader markets, possibly causing contagion effects.

This dynamic will be different for each currency. For USD, they are “not yet at a scale to trigger such contagion effects”.

The European Central Bank has studied this issue on stablecoins, taking Libra as an example. They estimated the Libra Reserve had the potential to be one of the largest European MMFs, potentially contributing to the “scarcity of safe assets in the euro area”. As a result, an “outflock shock" affecting the reserve could pose risks to the global and euro area financial markets.

In my previous newsletter, I mentioned that stablecoins operate outside of the fractional reserve model. This point is also emphasized in the BIS paper titled "Stablecoins versus tokenised deposits: implications for the singleness of money" (https://www.bis.org/publ/bisbull73.pdf), which favors tokenized deposits in accordance with the relationship between the central bank and commercial banks.

Nonetheless, I don't think stablecoins are completely done yet. I’m impressed with the speed of innovation that Circle is bringing. Not to mention that stablecoins currently enjoy ‘Metcalfe’s Law’ open network effects. Unlike tokenized deposits, stablecoins already exist and are well-adopted by the crypto community.

When it comes to regulation, Singapore and Japan (and soon HK) have very progressive regulations regarding stablecoins. Japan is the first G7 nation to have certain rules around stablecoin issuance. Mitsubishi UFJ Financial Group (MUFG), the largest financial group in Japan, is currently developing a stablecoin platform called Progmat Coin.

It will be interesting to observe whether Japanese stablecoins will play a significant role in the modern FinTech landscape, with Japan as a case study. Using a stablecoin for cross-border or online transactions is a sensible choice, particularly when considering the significant costs (3%!) associated with credit card payments.

However, the main concern lies in the competition that stablecoins face. Stablecoins are now competing with real-time payment systems, which are essentially free and instant in most developed countries. For instance, in Singapore, we have a fast payment system. So, why would someone choose to use XSGD for payments when SGD is widely accepted?

It will also take time for consumers to understand the difference between the money in their bank account, the money in their FinTech app, and stablecoins. They all carry different counterparty risks (sadly, only understood when SHTF) and different interoperability.

Wrapping up

Other significant effects of stablecoins include those relating to monetary sovereignty of developing countries. For instance, if a citizen in African country can access USD online, without needing to open a bank account, and chooses to hold their wealth in American dollars, it poses a challenge to the monetary sovereignty of the African country.

I haven’t even got to PayPal’s stablecoin yet, which I am still looking into. More to come.

Before I finish, I’d like to mention that there is a chat function on substack. This is a good venue if you would like to connect with me and the community reading this newsletter, and if you’d like to discuss any of the issues covered in the newsletter.

Enjoy your week! Don’t forget to share this newsletter with your colleagues and friends.

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Source: DALL-E 3

The Bank for International Settlements Innovation Hub (BISIH) has released an update on the mBridge project. To recap, as outlined in a previous post, mBridge is a consequential wholesale Central Bank Digital Currency (W-CBDC) initiative involving the central banks of China, the UAE, Thailand, and Hong Kong. Among multilateral CBDC projects, mBridge and Project Dunbar are the most substantial. China's participation in mBridge is particularly significant given its economic prowess, pivotal role in international trade, and the advanced stage of its retail CBDC project, the e-CNY.

The mBridge project is poised to advance to the next phase, aiming to become a Minimum Viable Product ready for commercial release in 2024. The collaboration has expanded to include four founding central banks and 25 observing members, among which are notable institutions like the IMF and the World Bank.

Source: BISIH

Developments are accelerating with the e-CNY as it begins to be utilized in international trade, potentially challenging the dominance of the petrodollar in this space.

Last month, according to China Daily, PetroChina successfully executed the first crude oil transaction using the e-CNY, which was settled at the Shanghai Petroleum and Natural Gas Exchange (SHPGX). This follows the SHPGX's earlier settlements of two LNG trades in conventional yuan rather than e-CNY, involving transactions between France's Engie and the China National Offshore Oil Corporation (CNOOC), as well as between France's TotalEnergies and CNOOC.

Ledger Insights reported that the Bank of China and the First Abu Dhabi Bank, the UAE's largest bank, have entered into a cooperation agreement concerning digital currencies at a recent Belt and Road Summit. In August, the UAE—alongside Saudi Arabia, Iran, Ethiopia, Egypt, and Argentina—became a member of the BRICS group.

From my perspective, mBridge carries with it four key implications:

1. Sanctions

The geopolitical impact of mBridge is profound: it has the potential to enable trade beyond the traditional US/EU sphere, circumventing reliance on systems like SWIFT, which is based in Belgium. It is important to note that mBridge intends to adhere to international standards, including AML (Anti-Money Laundering) and CFT (Combating the Financing of Terrorism) regulations.

Mr Richard Turrin, author of “Cashless”, an excellent book on the e-CNY which I wholeheartedly recommend, shared an intriguing post on LinkedIn:

MBridge's biggest impact will be on sanctions, as it sets up a decentralized blockchain (DLT) system that is sponsored by the supporting central banks and is not responsible for sanctions enforcement.

Each of the central banks supports a node on the platform and the platform simply transfers CBDCs between accounts. Sanctions are enforced by the individual commercial banks that use the system before they are put on the mBridge network. The users enforce sanctions, not the network!

Compare this with SWIFT which enforces sanctions on all network participants. Sanctions are built-in to the network, unlike mBridge. This is a revolution in payment transfers as the network is politically neutral.

I haven't found this detail in the report, but indications from the reports suggest mBridge has a decentralized governance structure, which corroborates this understanding.

2. Integration with China’s retail CBDC (R-CBDC) project, e-CNY

China is currently at the forefront of retail Central Bank Digital Currency (R-CBDC) with its e-CNY project. This year, in a pilot in Changshu, Jiangsu, government employees were paid with e-CNY. Additionally, a SIM card-based hard wallet compatible with the e-CNY app was launched, facilitating offline transactions.

For Chinese financial institutions, the mBridge project would serve as a strategic extension to the domestic e-CNY system, providing a holistic approach to managing liquidity. It would facilitate streamlined cross-border transactions, foster a unified infrastructure for both domestic and international finance, and possibly enhance policy formulation through shared insights between W-CBDC and R-CBDC environments.

3. DLT-based and EVM-compatible

The recent update reveals that mBridge utilizes a specialized, permissioned Distributed Ledger Technology (DLT) known as the mBridge Ledger (mBL), designed for instantaneous peer-to-peer and atomic cross-border payments and FX transactions using wholesale CBDCs. Notably, this DLT is EVM-compatible, employing Solidity for smart contract development.

Let's pause to recognize the magnitude of this: DLT is at the core of what is arguably the world's leading W-CBDC project, and elements of Ethereum technology are integral to its architecture.

Aren’t you glad you learned Solidity now?

It's a formidable nod to DLT's capabilities and the influence of open-source innovation, illustrating how cryptocurrency's pioneering technologies are integrating into the sphere of regulated finance.

The adoption of such technologies isn't just about the present; it's about setting a precedent. COBOL's integration into early banking systems, a language that continues to underpin mainframe computing, demonstrates the lasting impact of such decisions. Today's choice of DLT and smart contract languages like Solidity could dictate the future pathways of these global platforms in regulated finance.

4. Solving the cross-border payments quagmire

Cross-border payments were described by the CPMI recently as ‘slow, expensive, opaque and difficult to access for many users’. Estimates by Oliver Wyman and JP Morgan suggest that mCBDCs have the potential to significantly reduce the annual transaction costs of cross-border payments from $120 billion to $20 billion.

The existing cross-border payment framework, reliant on correspondent banking, is in dire need of modernization. A bank-to-bank, peer-to-peer payment system presents a logical progression. Through mCBDC systems like mBridge, cross-border payments could become quicker, more secure, and less costly.

Conclusion

The development of mCBDC projects like mBridge signifies a pivotal shift toward a more multipolar world order, underscoring a period of significant transformation in global affairs. As mBridge progresses and converges with the established conventions of international finance, it has the potential to foster the creation of an entirely new ecosystem—one underpinned by DLT.

I’m glad to announce it here, as I already did on LinkedIn that my book, ‘Decentralizing Finance’ is completed. The book is currently scheduled to be published in February and will be in all major bookstores globally, as well as on Kindle in a month or two after the print version is available. There's a lot to say about the book, and I invite you to go to the website that I have prepared for the book and its contents. You're going to be able to see a decent overview of the book, which includes the table of contents, the endorsements, the introduction, as well as me talking through it briefly on 2 videos.

The newsletter (for which I've chosen Substack as a platform) is really meant to continue where the book has left off, bearing in mind the rapidly changing landscape of digital assets, and there was a hard stop to where I could update the book before it went to the printers.

I look forward to continuing coverage of the industry which is a very rapidly evolving industry with this newsletter, covering some evergreen / fundamental content from the book and more topical sort of developments in the industry. In particular I’ll be doing some deeper dives in particular areas and cases.

I'd also like to extend a warm welcome to those who were previously subscribed to the De/Centralize email list. Moving forward, that list will be retired. If you're interested in staying updated on my work, which focuses on the three Ds: DeFi, Digital Assets, and DLT, I invite you to resubscribe to this new newsletter.

I organized the De/Centralize conference at Marina Bay Sands in 2018. Although I was pleased with the overall outcome, the event covered a broad range of topics. I'm now excited to narrow my focus to finance and DeFi themes, which notably exclude areas like gaming and logistics.

I'd like to share some key insights from my recently completed book, even though I understand you haven't had a chance to read it yet. One of the main themes I delve into, also underscored in the book's conclusion, is the inherent limitations of crypto in achieving financial inclusion on a global scale. Despite optimistic claims, there are fundamental obstacles that make it challenging for crypto to significantly impact the day-to-day financial lives of people, both in developed and developing countries. These structural limitations coexist with the cyclical bear markets that are a part of the crypto landscape.

Much of this complexity stems from the intricate web of regulations, compliance, geopolitics, and law. Additionally, the banking system plays a significant role, encompassing various elements from macroeconomic policy and taxation to money transfers. Multiple organizations are involved, contributing to the overall complexity of the global monetary and financial system.

Needless to say, crypto challenges traditional approaches to finance. While the technology holds promise, current policy leans more towards a prohibitive stance rather than a nurturing one. This caution is largely due to the multiple risks that crypto presents to the established financial system.

Exploring reports from standard-setting bodies (SSBs) like the BIS, IMF, IOSCO, OECD, and FSB has been enlightening for me over the past 15 months. Prior to this, many of these organizations were largely unfamiliar to me, including their roles and responsibilities. However, with the rise of DeFi, it's evident that these bodies are not only cognizant of its impact but are also actively monitoring the space, as evidenced by their numerous published reports.

Examining standard-setting bodies (SSBs) through the lens of DeFi has been instrumental in broadening my understanding of the international financial regulatory landscape. It helped clarify the objectives of each of these organizations and deepened my appreciation for their stances on issues such as money laundering and countering the financing of terrorism. Contrary to some views, their involvement isn't solely an imperialist effort aimed at undermining libertarian ideals.

Many actions taken by global regulators are indeed crucial. One case stands out in my memory. According to Chainalysis, a crypto transaction monitoring platform, the North Korean-sponsored hacker group Lazarus is suspected to be one of the world's leading perpetrators of crypto hacks. This group was also named in sanctions related to Tornado Cash.

The stolen funds are reportedly being used to finance North Korea's nuclear program. This revelation was a significant wake-up call for me, prompting a reevaluation of prevailing narratives surrounding these issues.

It's important to note that issues like money laundering and other illicit activities aren't exclusive to crypto; they occur in the traditional financial system as well. Often, crypto becomes a lightning rod for criticism when it comes to these negative aspects.

Understanding the perspective of international regulators is crucial. Another important consideration is the broader impact of DeFi. Specifically, how will it affect the lives and experiences of the 8 billion people on this planet? How will DeFi translate into the day-to-day experiences of the global population as a whole?

In this context, the second half of my book, which delves into topics like CBDCs, asset tokenization, deposit tokens, and institutional DeFi, may provide some insights. Projects like Project Guardian in Singapore indicate that regulators and central banks are certainly taking an interest in DeFi.

In particular, two reports that I think is worth reading to gain a high level sense of where things are heading are ‘The future monetary system’ and ‘Blueprint for the future monetary system’ from the Bank of International Settlements. What's intriguing is that the future monetary system envisioned by the BIS is described using terms commonly associated with DeFi, such as 'tokenization, programmability, interoperability, and composability.' Yet, the BIS also highlights the shortcomings of crypto, creating a nuanced narrative around its potential and limitations.

Clearly, the BIS thinks that the features being exhibited by DeFi are valuable. This, I think, is a good indication of how central bankers think about this particular phenomenon. They want the features but they don't want the assets, community or seeming lawlessness associated with crypto-native DeFi.

They aim to replicate these features within a regulated framework, a concept I refer to as "The Citadel" in my book. In my conclusion, I outline three evolutionary threads:

1. The Wild West: Crypto-native DeFi

2. The Bazaar: Crypto-native DeFi meets TradFi (RWA)

3. The Citadel: Regulated DeFi / Institutional DeFi

In the concluding section of my book, I focus on the future of money, particularly as it pertains to Distributed Ledger Technology (DLT). I argue that the future is essentially a three-way battle among stablecoins, Central Bank Digital Currencies (CBDCs), and tokenized deposits, each with different issuers. I believe there's a promising future for all three, but one of the less-discussed contenders is the tokenized deposit layer. This innovation has been spearheaded by institutions like JP Morgan.

From what I understand, even though CBDCs possess the capability, central banks have no intention of usurping the role of commercial banks. Central banks prefer that commercial banks focus on their areas of expertise, such as credit allocation and lending. This includes assessing borrower eligibility, overseeing extensive banking operations, and executing maturity transformation in money markets, among other tasks. Meanwhile, the macroeconomic aspects of monetary policy, such as setting interest rates, remain under the central bank's jurisdiction, allowing them to manage broader economic conditions.

The emergence of tokenized deposits has the potential to introduce a new array of features into the banking system, including faster settlements, interoperability, and programmability. These advancements could significantly enhance the efficiency of cross-border payments and generally streamline banking operations.

Ongoing comparisons between tokenized deposits and stablecoins offer valuable insights. For instance, a paper by JP Morgan underscored the limitations of stablecoins, particularly the restricted availability of high-quality liquid assets (HQLA) in their backing.

It's also worth mentioning that stablecoins like Circle's USDC and Tether's USDT operate outside the traditional framework of fractional reserve banking. These issuers typically back their assets on a 1:1 basis and usually lack banking licenses.

However, such stablecoins have already gained considerable traction online, benefiting from Metcalfe's Law. This gives them a first-mover advantage in the rapidly evolving landscape of payments innovation across various fintech applications.

In summary, that's a sneak peek into the conclusion of my book—without giving too much away, of course. :) I'm eagerly awaiting the moment you all can dive into this work, which has been beautifully crafted thanks to the dedicated efforts of a fantastic team at Wiley. Partnering with such a reputable publisher has truly elevated this project.

That wraps up this edition of the newsletter. Please feel free to share this post, subscribe, and let me know your thoughts. Substack now offers various features that allow for community engagement, so let's start a conversation about these topics. Thank you, and I look forward to connecting with you in the next newsletter.

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