Anastasia Evans, General Counsel and Company Secretary at IFX Payments
Talk of Britcoin – a UK-based central bank digital currency (CBDC) – presenting lucrative opportunities for business has been fuelled this month by Ben Broadbent, deputy governor for monetary policy.
As we continue to digitise, physical cash and the legacy system we are accustomed to is becoming increasingly obsolete, and new products and services are rapidly being adopted by businesses seeking to stay ahead of the curve.
Estimations suggest that cash payments could fall to as little as 10 percent of all UK transactions within the next 15 years. There are even suggestions that a long-awaited digital pound is likely to materialise this decade, highlighting a growing trend towards such alternative payment options.
It now seems inevitable that a continuation of recent trends will naturally lead to the acceleration of digital payment options and currencies.
Cash is being dethroned
We can all see the inherent benefits of cash – you can hold it and spend it without record and without seeking permission. But aside from the right to privacy and the anonymity afforded by using physical cash as a means of payment, it plays a central role in illegal activity, from purchasing drugs, paying bribes, to funding terrorism.
The world of digital currencies is complex and rapidly evolving. Recent events have highlighted the palpable risks of privately issued digital currencies dominating the digital payments sphere and there are strong arguments that central bank regulation would provide greater stability, transparency, and protection for consumers, not to mention an inevitable reduction in illegal activity such as money laundering and terrorist financing. Without a robust and effective regulatory framework in place, financial crime will flourish in this space, a point highlighted by the Financial Action Task Force (FATF). FATF’s recommendations aim to strike a balance between promoting innovation and financial inclusion, while also safeguarding against the risks of financial crime.
A Central Bank backed digital currency would create and maintain records of all transactions, through the use of blockchain technology, which allows for secure and transparent record-keeping. This will ultimately facilitate greater regulation in the industry, something which neither cash or privately issued digital currencies currently provide.
A CBDC would also allow a more efficient and reliable payments landscape. In the Bank of England’s own discussion paper they describe this as “the potential to allow households and businesses to make fast, efficient and reliable payments, and to benefit from an innovative, competitive and inclusive payment system”. Yet at present, there is limited availability of digital payments and weak payment interoperability, particularly when it comes to global payments.
As long as the Central Bank remains stable, the funds within a CBDC will do so too. This could potentially aid to avoid financial crises such as in 2008, which was the worst economic disaster that most of us have experienced. We’re still asking whether it was right for us, the taxpayer, to bail out the banks. Before 2008, most of us viewed banks as imperishable and enduring. Nowadays, consumers have never been more aware that this isn’t the reality and are asking how they will be protected in times of financial instability. A CBDC can help to stabilise the financial system by providing a safe and secure form of currency that is backed by the central bank and by improving the efficiency and reliability of payment systems.
The Opportunity for Fintech
A CBDC presents a number of opportunities for fintechs to grasp a hold of. For starters, a Central Bank will likely be largely reliant on EMIs and PSPs, such as IFX Payments, to deliver a CBDC operationally. Tech-savvy fintechs such as IFX have a wealth of expertise and know-how; facilitating payments through technology is our niche. We are also nimble, agile and very used to implementing change quickly (compared to the industry’s large incumbents) meaning that we can adapt and adjust to the new ecosystem and deliver to end users as a third party service provider.
As long as EMIs and PSPs can fulfil certain prerequisites of participating in the CBDC ecosystem, who better to ‘add value’ and deliver to the end user? I’m confident that an organisation like IFX, with its robust compliance procedures and processes will be well-placed to participate.
With the support of fintechs on its side, the Bank of England would become a force to be reckoned with within the digital payments sphere and straighten out a lot of the issues presiding at the current time. But if it fails to react, it will ultimately lose the race to privately issuing contenders, a proposition that will present further complications to an already rocky industry. So to The Bank of England, I say – time is of the essence!