Kevin Braine, Global Head of Research and Operations for Kroll’s Compliance Risk & Diligence practice
Undoubtedly, the future for currencies is digital. As cash use falls year on year—accelerated by the pandemic and an ever-growing e-commerce sector—digital means of payment will continue to fill the void left by the traditional means of currency. The question remains: what shape will digital currencies take?
Cryptocurrencies have yet to demonstrate themselves as a viable and wide-reaching solution, still falling victim to the original uncertainties faced during the early years of inception. High fluctuations in worth and an unpredictability of regulation have meant that the bumps in the road for the wider use of crypto as a form of usable payment have yet to be ironed out.
Central Bank Digital Currencies
In response, central banks are considering the idea of adopting the principles of cryptocurrencies, but turning them into universal digital currencies. Known as a central bank digital currency (CBDC), if achieved, this will undercut existing private markets and introduce a new landscape form of national payment, incorporating the core concepts of existing cryptos but under a new banner.
China has been ahead of the curve in implementing CBDCs. The country recently announced that its centralised digital currency, the digital counterpart to the renminbi (CYN), could be used for payments starting in January 2022. The programme had been under testing since 2014, and at the end of 2021 had handled transactions worth $13.8 billion. With the recent incorporation of China’s two payment giants on the platform, there has been another leap forward in the development of CDBCs. China has also seen a string of other landmark achievements for adoption, including cross-border testing of the digital renminbi, as well as large-scale trial runs with 261 million participants across Shanghai, Beijing and Shenzhen, with more cities signing up to the so-called ‘e-CNY trial’ as of this month.
Other regions are following suit, too. The EU’s plans to introduce a bill for the establishment of a digital euro by 2023 demonstrate the growing commitment from European central banks to CBDCs by laying the legislative foundation for their implementation. Developments are ongoing, but current timelines place the earliest introduction of a digital euro in 2025.
In December 2021, the Banque de France completed its interbank settlements in CBDC experiments, examining the potential of introducing a digital euro. The latest test case consisted of the issuance of a digital bond on a blockchain and its subscription with a settlement in CBDC, designed to investigate whether interoperability – which is vital for the functioning of markets – would be possible with a proposed digital euro.
The drawbacks
Cyber security, for both individuals and states, is a primary factor against a guaranteed future for CBDCs. For the average user, credential theft through social engineering or advanced malware could be a fear. Causing further concern is that the technological structure of centralised currencies would be a target for terrorists looking to disrupt a nation’s economy. A CBDC would require heavy regulation to prevent such manipulation and operate on an extremely robust technological structure.
The primary argument is that the structure, widespread application, and risk of potential manipulation would outweigh the proposed benefits. The likelihood of many major currencies becoming digital and being globally recognised as a primary currency in the immediate future is slim, as central banks continue to wrestle with this fundamental practicality. Until strides in research are made to iron out concerns and practicality issues, cryptos look set to continue making ground, changing the payment landscape as they become more popular among the public.
The stable alternative
Estimates have placed the valuation of the global cryptocurrency market at nearly $5 billion by 2023, more than tripling its current value. Mainstream players in the payment sector are beginning to make the move into crypto, offering their customers the ability to buy, hold and sell various virtual currencies. However, success is countered with volatility.
Stablecoins are presenting themselves as a more viable option, offering an alternative to the wild peaks and troughs of crypto by providing a digital version backed and priced by the value of an existing currency or commodity, such as the U.S. dollar or gold. Proponents of stablecoins envision that users will enjoy the benefits of crypto, including cheaper international payments and fast settlement times, without the associated volatility.
While these ‘stable’ alternatives are still yet to be accepted as a formal payment method, they are gaining mainstream personal and business traction. Its unique selling proposition ((offering the benefits of crypto with less of the risks) will remain attractive, but its practicality as a product has yet to be proved.
While the future is digital, there are competing visions for the specific path currencies will take. If central banks around the world follow China’s lead and ramp up implementation initiatives for their respective CBDCs, then we could see cryptos and stablecoins made redundant by digital counterparts to the yuan, euro and U.S. dollar. However, a successful introduction of a CBDC has still yet to be seen and the practical infrastructural measures needed are still developing. Until then, stablecoins and less volatile cryptocurrencies will continue to make strides.
Kevin Braine is the Global Head of Research and Operations for Kroll’s Compliance Risk & Diligence practice. He is an expert in anti-bribery and anti-corruption, and works closely with Kroll’s investigation, regulatory consulting and transaction advisory practices.
