Banks will soon need to pivot. Visualize a time where you need various messengers to send different categories of messages — for example, WhatsApp for text messages, Telegram for video, Viber for audio, etc. Considerably difficult, isn’t it? However, this is exactly what happens in finance: There isn’t any unitary way to send both virtual fiat money and cryptocurrency from a bank account without multiple steps. This issue is not affecting the entire population just yet, but after the distribution of national digital currencies, or central bank digital currencies, in these next few years over the entire world, the situation is almost to the point of becoming a reality. We must begin developing for a solution now.
CBDCs call for a multi-format framework
The conventional financial system can’t dismiss newly emerging technologies anymore. In consonance with the Cambridge Center for Alternative Finance, the amount of cryptocurrency users
has essentially tripled from 35 million people in 2018 to 101 million people in Q3 2020. Another study, performed with the aid of researchers from the United Kingdom’s Financial Conduct Authority, exhibited a 78% increase since 2019.
Cryptocurrency enterprises are beneficial, and most importantly lucrative. In Q4 2020 alone, PayPal expanded its amount of transactions by 36%, which is valued at about $277 billion. The escalation began in Q3 2020 when the business enterprise introduced crypto transactions. This is one of the highest quarterly returns in PayPal’s history.
However, central bank digital currencies are gradually becoming a part of our daily lives and will be heavily ingrained within the next three to five years. Furthermore, we need a completely new infrastructure for its mainstream acceptance. China was the first to heartily promote its digital yuan project — known as the Digital Currency Electronic Payment, or DCEP. China is thoroughly focused on the infrastructure because several considerable local banks have already developed or are individually developing their e-wallets — the central mechanism for working with DCEP.
So far, the Chinese digital yuan is the most effective instance of digital money issued by central banks that is truly functioning well. Markedly, more than 60 central banks around the world are delving into this opportunity. DCEP is constructed on centralized blockchain technology entirely regulated by the Central Bank of China. This technology makes it conceivable to gain complete authority over all financial transactions, assures social spending targeting, enhances tax collection, and forestalls financial crimes.
Following this, the worldwide payments system Visa recently introduced a protocol for offline transactions with central bank digital currencies. To pay or accept payments offline merely requires downloading a mobile application. In this case, CBDCs supplant cash, leading to an escalation in the number of transactions regulated by the issuer, bank, or financial intermediary.
The financial multi-format framework is leaning towards becoming a requirement for financial instruments. Banks will have to guarantee that fiat, CBDC, and crypto transactions can be made in one place: in a banking application. However, there is a catch: The new compositions have nothing in common with their predecessors. Moreover, governments view the introduction of CBDCs as autonomous. In other words, it does not adhere to a unified guideline or principle with neighboring countries.
Challenges combining “old” and “new” money?
Cryptocurrencies and CBDCs are comparatively new. Therefore, there is a lot of uncertainty encompassing these financial instruments. With that said, fiat and digital money share prevalent functions, and the manner and quality of their implementation affect how the multi-format financial solution is going to be constructed.
Building a multi-format financial solution calls for a unified approach to assent. If each service conducts Anti-Money Laundering checks for CBDC and cryptocurrency transactions following its policy, the bank on the receiving side will not substantiate them.
People who aren’t in deep participation with crypto might think digital assets cannot be integrated into conventional business operations, yet this is untrue. Our involvement and prior experience exemplify the necessity to create a unified approach to conformity — the same for both conventional fiat and crypto. Public vilification of all digital asset owners remains in the way of that.
Furthermore, the devices in crypto finance are considerably more effective in AML than those in the conventional system. For example, Know Your Transaction procedures can display the complete transaction history for a particular cryptocurrency — from the moment the token was created to when it was discharged to the user’s wallet, in addition to every operation in between.
The Challenges of Versatility
The variations among “old” and “new” wealth exemplified above are just a few examples, but they are momentous enough that we cannot foresee the seamless use of disparate forms of money. That is why the compatibility between the two is notably pertinent for many banks and fintech services.
We are commencing a new era of abounding financial intermediaries of all shapes and sizes. They will serve their niche, integrating various forms of electronic money, CBDCs, and cryptocurrencies, using a plethora of services. For example, Visa cards already support fiat, crypto, precious metals, and Bitcoin (BTC) cashback.
When people and corporations can choose between different types of currencies/payment systems/money, only those financial companies that can use a wide variety of services and formats at once can be considered universal banks.