Digital assets are now a daily reality of our global financial ecosystem. According to
Atlantic Council, currently 130 countries have investigated CBDCs. This is up from just 35 in May 2020. The global crypto wallet market is also expected to grow at a compound annual growth rate of 24.8%
from 2023 to 2030 to reach USD 48.27 billion by 2030, according to
Grand View Research.
This is an excerpt from The Future of the Global Financial Ecosystem 2024: A Sibos Special Edition.
These payments technologies are now becoming a part of the fabric of our global finances; however, their wider impact is not yet clear. There is the possibility that the use of these payments advances will allow for a more connected global financial
system. CBDCs and tokenisation could be integral in reducing friction between international systems, but friction could also be increased where infrastructure is not aligned.
Looking towards the future of CBDC, cryptocurrency and tokenisation, it’s important to understand where these technologies currently are, the impact they will have on our existing systems, and the influences that they could have on each other.
CBDC vs crypto: running two different races
Cryptocurrency is arguably the payment technology with the most widespread understanding and awareness. Cryptocurrencies have grown in popularity over the years, in part due to their decentralised nature, which allow for many to exist outside of the traditional
financial system.
This decentralisation is also part of the reason why cryptocurrencies have been involved in a number of scandals and are increasingly being regulated. The
EU, the
USA, and the
UK have all been working on their cryptocurrency regulations, as well as many individual countries throughout the world.
A more centralised alternative to cryptocurrencies has been seen to be CBDCs. Marion Laboure, an analyst at Deutsche Bank Research argues that it is not “if” but “when” retail CBDCs will arrive in our markets. A number of countries are well on their way
to in depth investigations, and many others have already begun the process of rolling them out, such as Jamaica and Nigeria.
Therefore, it is worth raising the question over whether with the advent of CBDCs, will cryptocurrency be made redundant by a more conventional digital asset solution connected to a central bank?
Robert Pehrson, head of product management corporate banking, SEB, argues the case that “decentralised cryptoccurrencies provide limited value today as means of payments and the hype has been mainly about the increase in value. For the future there are many
opportunities in combining the technology behind crypto and the trust built into CBDCs through the support of central banks.”
However, Teunis Brosens, head of regulatory analysis, ING, says that “cryptocurrencies and CBDC are quite different beasts.”
Brosens continues: “From an ideological and fundamental perspective, they are coming from opposite directions. The popularity of cryptos in practice is about these fundamentals for some people, but it’s about investment and speculation for most. CBDCs on
the other hand, will never be an investment asset. Their primary and often sole aim is to be a safe and reliable means of payment.”
He concludes that “cryptos and CBDCs in practice really are apples and oranges. What the future holds for cryptos is uncertain, but it is unlikely to be determined by CBDC.”
Compared to Pehrson and Brosens, Laboure takes more of a middle ground and says that cryptocurrencies like “Bitcoin and Ethereum, alongside several others, has crossed a threshold after which they are unlikely to just disappear. Not all cryptocurrencies
will survive. The recent scandals and bankruptcies have exposed serious vulnerabilities (e.g., lack of transparency; lack of regulation; concentration risk; and conflict of interest). A clean-out of bad actors is needed, and regulation is coming.”
However, Laboure does not have an overly promising perspective on CBDCs either. She highlights that while “CBDCs could disintermediate the banking system, impacting and financial stability,” she states that they “see the impact rather limited as (i) the
digital currency model favoured is the two-tier issuance; and (ii) looking at live CBDCs, the adoptions level have been very limited.”
Considering these perspectives, it seems clear that CBDCs are not likely to make cryptocurrency redundant. Having said that, the increasing amount of regulation and the growth of CBDCs may mean that the number of cryptocurrencies that can survive will be
limited, and they will remain to service somewhat different purposes.
Global financial connectivity: the same old problem of agreed standards
The challenges of global financial connectivity and interoperability are a consistent concern for the world’s banking community. CBDCs, cryptocurrency and tokenisation offer the possibility for these problems to
be solved in one sphere of the sector. This is especially true of CBDC, where if the international central banks are working with similar infrastructure, they may be able to lower much of the friction the industry currently faces.
Sabih Behzad, head of digital assets and currencies transformation, Deutsche Bank, predicts that “in the long term, we do expect greater levels of global connectivity with digital assets and payments flowing on a 24/7 basis utilising cheaper and more efficient
rails. There are several proof of concepts (PoCs) demonstrating this potential, some of which have been run by the Bank for International Settlements (BIS).
While these have successfully showcased how cross-border payment vs payment (PvP) or delivery vs payment (DvP) solutions could work, several barriers to adoption remain – including an agreement on standards, clear regulation and achieving critical mass.”
The barriers Behzad mentions are the same problems that much of the international banking community have been facing for years, and they are not easily overcome. Brosens agrees with Behsad’s perspective: “Token ledgers are by nature much more geared towards
joint deployment, connectivity, access and sharing. That said, technological possibilities are far from the only aspect relevant for global connectivity. The governance challenges of converging on shared infrastructure standards, that we know all too well
in the banking industry, apply to tokenised infrastructure as well, as do political considerations.”
Pehrson has a more positive outlook on what the global community reaching this connectivity goal means. He argues: “Tokenisation of assets can deliver on those values assuming that the banking community can agree on common standards and establish platforms
that ensure broad reach to many stakeholders. If there is a willingness among nation states and common international forum this could be a way to improve global connectivity but it is the willingness and not the technology that matters most.”
Mark Brant, chief payments officer, NatWest states: “Digital money has the potential to transform the financial sector, drive innovation and competition, making financial products more widely available.”
Yet, Brant notes that the changes to these technologies could create connectivity problems of their own. “The shift from purely electronic payments to a tokenised always on world could exclude those on the other side of the digital divide and open the door
to fragmentation, currency substitution, and loss of policy effectiveness, therefore it is essential that any transition is coordinated and soundly regulated. This will require public and private collaboration and farsighted policy support to ensure a robust
framework to combat Fin Crime, enhanced cyber resilience and the education of all parties in the payments chain to encourage adoption; design choices must also ensure that new forms of digital money are environmentally
sustainable and inclusive.”
The major roadblock to connectivity will be the same old problem of the lack of concord of the international community. Technology may be able to help this problem in some sense, but will not be able to bypass this discord in the long term.
Digital assets: still plenty to offer
Creating global connectivity across payment systems does not seem to be able to be aided entirely by these technological advances. This will require more communication, but commentators are still positive about the advances which these digital assets can
offer the system.
Brant points out that “digital money could also bring opportunities, such as more effective real-time data analytics and monitoring, programmability, improved reconciliation and settlement and improvements to cross-border payments. The path to digital money
adoption must be guided by a clear and responsible vision of tomorrow’s broader payment, financial, economic, and environmental landscape; key to this will be cooperation, domestically and internationally, to avoid fragmentation of payment systems and the
market more generally.”
Pehrson contends that it is still early days for many of explorations into digital assets. However, he sees that, “wholesale CBDCs have great potential to reduce costs and risks as well as improve efficiency in the financial system. The value and use cases
for retail CBDCs are very dependent on specifics of the local payment markets. In a country like Sweden where cash is almost never used the value is different compared to markets where a retail CBDC could provide as good alternative to cash.”
Brosens sees this from the perspective of tokenisation, which he argues “has the potential to broaden access. This applies to the demand side, where tokenisation may unlock new funding for e.g., SMEs that lack access to financial markets. It also applies
to the supply side, where tokenisation allows individual investors to compose in much more detail the portfolio that matches their preferences. The programmable features inherent to tokens allows for further innovation. From a market perspective, this is unlikely
to displace banks, but it is a welcome diversification of funding and investment options.”
A major question as we continue to grow digital assets is how they will fit into the legacy infrastructure. Behzad’s view is that: “depending on the precise form and asset being tokenised, tokens can be accommodated within legacy banking infrastructure.
This usually does require some level of integration with back-office systems, such as those that relate to tax, accounting, and reporting.”
Digital assets have the potential to transform the global financial ecosystem. The technology they provide may allow for the interoperability and connectivity which the international financial community have been driving towards for years. However, the roadblocks
to this are ever the issues of international cooperation and infrastructure.