Digital currencies are becoming mainstream, with advancements in several areas that the financial industry needs to be aware of.
This will be the year that CBDCs move off the whiteboard. The initial excitement around CBDCs is evolving into real-world uptake from central banks, driven further by the current cryptocurrency boom in bitcoin and Ether.
With Tesla and other high-profile institutional investors piling into the crypto space, digital currencies continue to move up the agenda for governments, central banks and regulators around the world. Meanwhile, large custodians like BNY Mellon along with key payments networks including Visa, Mastercard and PayPal are preparing to service the rapidly accelerating digital currency landscape.
This is driving use cases of digital assets such as CBDCs that apply the key benefits of this technology in a way that is safe, regulated and sustainable as a long-term alternative to cash. The question over the potential of this kind of digital asset to replace traditional cash is no longer if, but when.
This leads into the second consideration to keep in mind, which is privacy. As money goes digital, the common denominator for any digital currency is privacy. Any digital currency that fails to protect the data involved in a transfer of value will burn out as fast as it booms.
For central banks, this means being judicious in assessing the different technologies that are at their disposal to support a CBDC, keeping privacy features front of mind. The underlying architecture of a CBDC will ultimately inform its longevity and this means carefully differentiating between the different technologies available to support it.
Finally,private-public collaboration is the future of CBDCs. The objective for many countries on a quest to digitize is clear, but the path to reach currency digitalization is still ambiguous. The solution is ultimately rooted in public and private sector collaboration, and the good news for central banks isa lot of the hard work has already been done.
Central banks can use blockchain platforms and plug into these new interconnected networks that were previously disparate and mutually incompatible. This significantly reduces the workload of bringing a digital currency to market, and enables policymakers to focus on policy and monetary control, rather than building and rolling out an entirely new technology infrastructure from scratch.
As central banks have a mandate to provide a safe and efficient payment system, it is highly unlikely they will allow digital money to be exclusively issued by risky private sector entities. After all, money issued by the private sector has default risk (somewhat tempered by government backed deposit insurance schemes), while central bank-issued money does not.
Therefore, central banks must offer an alternative monetary substitute for consumers for a resilient cashless society to exist, perhaps leveraging technical progress from private sector players.
When it comes to Diem, it can be said that its foremost and perhaps only real achievement is pushing regulators to take a stance on stablecoins. This is not unimportant, however, as many large institutions are looking to stablecoins as a way to cash in on the rise of digital currency, while still maintaining a modicum of stability.
