Fiat Freeway: GMO’s JPY-pegged Stablecoin Rises in the Big Apple and Fed Researchers Weigh-in on Digital Asset Tokens vs. Accounts

By: Mike Rogers, The Block Research

Quick Take

  • ‘Fiat Freeway’ is a weekly column providing the latest updates on central bank digital currencies (CBDCs) and stablecoins.
  • This week’s column first examines GMO-Z.com Trust Company Inc.’s trust charter approval from the New York State Department of Financial Services (NYDFS).
  • We conclude with a review of a recent FEDS Note on the tokens vs. accounts classification of digital assets, particularly CBDCs.

Last week, ‘Fiat Freeway’ explored Visa’s novel offline payment system (OPS) protocol, which expands the global payments technology company’s fast-growing digital ecosystem into CBDC.

We’ve also previously covered Paxos’ $142M Series C fundraising, FinCEN’s proposed KYC rule for digital wallets, digital asset firms seeking banking licenses, digital asset industry backlash from Capitol Hill, China’s Digital Currency Electronic Payment (DC/EP), the ECB’s ‘digital euro’ initiative, the Fed’s classification of CBDC literature, Norges Bank’s study on CBDC ‘Safe Asset’ Funding, an ECB Board Member’s stablecoin speech, Circle’s blog post on using stablecoins for US foreign policy, and a BIS paper on “rigid stablecoins.”

Today, we start with GMO-Z.com Trust Company Inc.’s trust charter approval from the New York State Department of Financial Services (NYDFS).

GMO’s JPY-pegged Stablecoin Rises in the Big Apple

On December 29th, 2020, the NYDFS announced that it had granted a Limited Purpose Trust Charter to GMO-Z.com Trust Company Inc. (GMO-Z Trust), a subsidiary of the Japanese internet conglomerate, GMO Internet Group (GMO).

According to the NYDFS press release, the charter authorizes GMO-Z Trust to “issue, administer, and redeem Japanese Yen and U.S. Dollar-pegged stablecoins in New York. The Japanese Yen stablecoin will be the first of its kind available to the public.” With Japan being known as “The Land of the Rising Sun,” it’s only fitting that the world’s first regulated JPY-pegged stablecoin be issued by a Tokyo-based multinational company.

GMO operates the largest online FX broker globally by trading volume (GMO Click) and the most used payment gateway in Japan (GMO Payment Gateway), which processed the equivalent of $47 billion in transaction volume last year. The conglomerate owns a regulated Japanese banking business (GMO Aozora) and a digital assets exchange (GMO Coin), both of which are registered with the Japanese Financial Services Agency (FSA). To top it off, GMO also runs several cryptocurrency mining operations.

Since GMO is already involved in online payments, banking, foreign exchange trading, asset clearing and settlement, remittances and cryptocurrency, launching its own stablecoins seems like a natural and strategic move. Incorporated under New York State banking laws, GMO-Z Trust can now legally create its Japanese yen-backed stablecoin (GYEN) and U.S. dollar-backed stablecoin (ZUSD) in the Big Apple. GYEN and ZUSD will likely be listed on several digital asset exchanges throughout 2021.

As calculated in The Block Research’s forthcoming ‘Stablecoins: Bridging the Network Gap Between Traditional Money and Digital Value’ research report, 99% of the total stablecoin supply is pegged to the U.S. dollar; the remaining supply is split, with 0.4% pegged to the South Korean Won (KRW) and another 0.4% to the Euro (EUR).

This phenomenon is mainly attributed to the composition of traditional fixed income and foreign exchange (Forex) markets, where the U.S. dollar reigns supreme. It is the most widely held reserve currency, representing about 61% of international foreign currency reserves.

With the total stablecoin supply weighing in at about $30.03 billion as of January 4th, 2021, that means about $29.73 billion is denominated in U.S. dollars. So, ZUSD will aim to gain a piece of the rapidly expanding USD-backed stablecoin market.

Since GYEN is the first regulated JPY-pegged stablecoin, GMO has an opportunity to serve a major untapped market. According to a Bank for International Settlements (BIS) survey of central banks, the yen remained the third most actively traded currency (on one side of 17% of all trades) in 2019. Given GMO’s plethora of businesses in the APAC region, and their global distribution network, GYEN has the potential to reach a mass of users.

GMO management envisions that customers and employees will eventually be able to transact domestically and internationally — for remittance, payments, trading and settlement — using GYEN and ZUSD. They hold that stablecoins will be faster and offer a more efficient settlement vehicle than the traditional banking rails in the future.

If the OCC’s latest interpretive letter is any indication of where things are heading, then GMO is already ahead of the curve. The financial regulator now holds that Federally chartered banks and thrifts can employ independent node verification networks and make use of stablecoins for payment activities.

To learn more about GYEN and ZUSD, The Block Research Members should be on the lookout for our stablecoin report, which will be released later this month.

Fed Researchers Weigh-in on Digital Asset Tokens vs. Accounts

In our ‘Fiat Freeway: CBDC storytime with the Federal Reserve’ column from early November, we noted that the Board of Governors of the Federal Reserve System had recently created a Twitter, @FedResearch, to share some of its ongoing research efforts publicly.

The Fed’s account mainly tweets links to the central bank’s latest research papers and FEDS Notes. FEDS Notes are short articles written by Board staff sharing their individual views and analysis on economics and finance-related topics.

On December 23rd, 2020, @FedResearch shared a link to a FEDS Note on digital asset classification.

The ‘Tokens and accounts in the context of digital currenciesFEDS Note was written by Alexander Lee, Brendan Malone, and Paul Wong.

Lee is Chief Information Officer & Executive Vice President the Federal Reserve Bank of New York (NY Fed), Malone is a senior financial institution and policy analyst in the Federal Reserve Board of Governors’ Division of Reserve Bank Operations and Payment Systems, and Wong is Head of the Federal Reserve Board’s Digital Currencies Experimentation Program.

We find it important to list their backgrounds, as the digital assets industry brings together a multitude of thought processes and topical areas of knowledge. Thus, knowing the career experience of an author lets the reader understand their perspective when addressing different challenges in our field.

Lee, Malone, and Wong put it best when they explained the reason for creating the FEDS Note, writing:

“Despite the prevalence of the terms ‘token’ and ‘tokenization,’ their meanings are still confusing to most. What is a token from a technical perspective, and from a conceptual or functional perspective? Many people use ‘token” as if its meaning were self-evident. References to tokens in the economics literature, computer science publications, technology blog posts, and general newspapers are inconsistent, as different people use the term to describe different (but related) things. Is a token a physical object, a digital object, something defined by a smart contract, or something else entirely? This lack of consistency has arguably led to further confusion and miscommunication.”

We can attest to the ongoing discussions and research related to the “tokens vs. accounts” topic. In The Block Research’s ‘A Global Look at Central Bank Digital Currencies’ white paper, we analyzed the International Monetary Fund’s (IMF) “Money Trees” framework, which categorizes payment methods through a conceptual lens using 4 key attributes: 1) type, 2) value, 3) backstop, and 4) technology.

The first attribute, type, defines a means of payment as either a claim or an object. A claim can be the traditional “account-based” payment systems, whereas an object is more closely aligned to “token-based” payment systems.

The IMF prefers to distinguish further from account vs. token based payments due to the fact that a “token” tends to be coupled with the technology used; in the case of CBDC, blockchain or distributed ledger technology (DLT). There is a building debate that blockchain-based payment systems are more suited to be labeled as account-based since it verifies asset ownership via addresses associated with a ledger. Whether that ledger is distributed, or centrally managed, shouldn’t impact whether a system is account or token based, at least in the eyes of proponents such as the IMF.

Object-based payments systems settle near-instantly and don’t require any exchange of information to complete the transaction — the most common example of object-based payments are cash. Claim-based payments, however, offer a way to scale and simplify transactions, at the cost of a need for intermediaries and more complex infrastructure (and counterparties) to complete the transaction. Today, most payments are done through claim-based systems.

The Fed appears to be taking the distinction between token-based and account-based digital assets quite seriously. Liberty Street Economics, the Fed’s blog, released a post co-authored by Malone in August 2020 discussing the topic. Four months later, the “tokens vs. accounts” dichotomy warrants a more detailed FEDS Note with 28 different references. One is left to wonder if a tokens vs. accounts research paper is on the horizon?

As for the FEDS Note, it is divided into two main sections. The first section explains how the digital assets industry views the topic, at least from the perspective of the Fed. It mostly discussed Ethereum and ERC-20 tokens, which regular readers of The Block Research should be well familiar with. Lee, Malone, and Wong found that the digital assets community considers tokens to be programmatic assets existing on a blockchain.

The second section focuses on monetary authorities’ views of tokens in relation to CBDC, which is the real value of the piece. As one might expect, the Fed’s position aligns closely with that of the IMF, where the accounts and tokens terminology is used to distinguish between CBDC system architecture. Furthermore, Lee, Malone, and Wong elaborate on four issues related to communication between the digital assets community and the central banking community when it comes to the tokens and accounts topic.

As written in the piece, these issues include:

  • Making tokens and accounts an “either/or” choice is counterproductive, as the vernacular is not common between the digital assets and central banking communities.
  • The concept of a “digital object” form of money (i.e., coin, object, or bearer instrument) stored in a wallet or locally on someone’s machine raises significant questions regarding technological feasibility, safety, and security.
  • Calling systems that feature true local and blockchain-based systems “token-based,” obscures the diverse technological underpinnings of each form of electronic recordkeeping.
  • Since digital tokens are fundamentally just pieces of information in both cryptocurrency and central banking, people may not only be referring to physical assets when discussing tokenization.
  • There can often be confusion between the communities around what exactly a token represents.
  • Today, many CBDC reports focus on either conceptual, policy topics or technical issues.
  • The intersection of analytical concepts and technical implementation is necessary to avoid further confusion over what a token is, what can it do, how it can support a digital currency, and what it means in the context of a CBDC.
  • As jurisdictions consider legal frameworks and oversight regimes around the issuance and use of digital currencies, the need for clear use of words and clear definitions becomes even more important.

From a policy-making perspective, given the extent of global stakeholders that the internet and by extension digital assets, such as stablecoins and CBDCs, can reach, it is critical that language be standardized across communities. This recent FEDS Note helps move the conversation forward, and we will certainly be on the lookout for a potential future paper by Fed researchers on digital asset tokens vs. accounts.

Building Financial-Grade Digital Assets. The World’s First Regulated JPY-Pegged Stablecoin Issuer.

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