Central Banks Have Retail CBDC Ideas + UK Crypto Popularity Rises

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Good morning, at Global Custody Pro we track what's happening in global custody, clearing, payments, and digital assets. We filter through industry news to bring you what matters most in clear language.

🌏 Global Custody News

IOSCO has released a report examining post-trade risk reduction services (PTRRS), which help financial firms cut trading risks and operational costs. The International Organization of Securities Commissions' report calls for more transparency around these services and recommends ways for firms to better manage risks.

While PTRRS provide clear benefits like reducing counterparty exposure and freeing up capital, their concentration among just a few providers and lack of oversight could pose problems. Major issues identified include limited transparency around the algorithms used, data security concerns, and operational risks if a provider fails.

So what? This matters because central counterparties (CCPs) are a crucial firewall in the financial system, and how firms manage their exposures through PTRRS directly impacts CCP risk management. If these services don't work as intended or face disruptions, it could affect how much collateral firms need to post and potentially create ripple effects through the derivatives clearing system during times of stress.

Source: IOSCO PTRRS Report

A new study examining hedge fund liquidations between 2013-2023 reveals that over 3,500 funds were shut down during this period, with 86% of those reporting target returns having underperformed before closure. The research, based on Preqin Pro data, shows that while poor performance is a major factor in fund closures, operational issues can lead to even more severe consequences for investors.

The study outlines four scenarios of increasing severity: simple underperformance, risk management failures, internal control breakdowns, and outright fraud. These scenarios can result in liquidation periods ranging from 6 months to 2 years, with potential losses increasing dramatically when operational failures or fraud are involved. The research emphasizes the importance of thorough due diligence, including strategy evaluation, third-party verification, and assessment of risk management frameworks.

So what? This research highlights why custody arrangements in private markets are crucial for investor protection. While traditional assets like stocks and bonds have well-established custody systems through major banks and depositories, private market assets often involve more complex custody arrangements. Proper custody structures, including independent fund administrators and robust verification processes, can help prevent or at least quickly identify potential fraud or operational failures. This is particularly important given that recovery of assets in fraud cases can be extremely difficult, even with legal proceedings.

Source: AIMA Article

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🚀 Digital Asset News

The BIS and major central banks have published detailed guidelines for launching retail digital currencies, focusing on critical issues of privacy, cybersecurity and offline use. The joint reports came from central banks in Canada, Europe, Japan, Sweden, Switzerland, UK and US, working with the Bank for International Settlements.

The banks emphasized that while existing cybersecurity practices would mostly transfer to digital currencies, enhanced protections may be needed due to increased cyber attack risks. Each country must update its laws before launching digital currencies, particularly around privacy protection and international transactions.

So what? The reports show how central banks are creating government-backed digital money that differs fundamentally from private stablecoins like USDC or Tether. While stablecoins are issued by private companies that promise to maintain reserves to keep their value stable, CBDCs would be direct obligations of central banks - similar to digital versions of physical cash, backed by the full faith and credit of national governments.

Sources: BIS Legal Report | BIS System Design Report | BIS Publication Release

UK crypto ownership has risen to 12% in 2024, up from 10% in 2022 and 4.4% in 2021, according to new FCA research. The study found 72% of users store assets on their purchase exchange, up from 59% in 2021. While Bitcoin remains dominant, awareness of other tokens like Ethereum and stablecoins is growing.

The findings reveal mixed signals on consumer behavior - 58% of users are comfortable with an unregulated market, yet 20% wrongly believe they have financial protection. New trends include increased staking activity (27% of users) and growing reliance on social media for information, though traditional media remains the primary introduction to cryptoassets.

So what? The research highlights a key industry divide: retail investors favor convenient exchange custody while institutions require sophisticated custody with robust security, compliance and insurance. This suggests regulators must balance protecting retail investors who may not grasp custody risks while enabling institutional-grade custody services. Bridging this gap in security standards and protections remains crucial for market development.

Source: FCA Press Release | FCA Research Report

The Wolfsberg Group, representing 13 of the world's largest banks, has released new guidelines explaining what counts as a digital asset - from Bitcoin to CBDCs - and how banks should think about their risks. The guidelines aim to create common ground in how banks handle these assets, especially when it comes to preventing financial crime.

These guidelines are stricter than some existing rules, for instance treating certain NFTs as digital assets that need monitoring, and including central bank digital currencies in their scope. The document also clearly defines who counts as a digital asset service provider and what obligations they have.

So what? While these guidelines aren't law, they matter because when the Wolfsberg Group speaks, banks listen. The guidance will likely become the standard way many banks approach digital assets, helping create more consistent practices across the global banking industry at a time when official regulations vary widely between countries.

Source: Wolfsberg Group Report