According to a report titled “The Future of Payments 2022”, published by British company Finextra Research, digital assets such as central bank digital currency (CBDC) and stablecoin could coexist with legal tender in the future, but their “trajectory and impact” cannot be known immediately.
Ville Sointu, former head of emerging technologies at Danish bank Nordea, said: “It is the publicly stated goal of central banks to ensure that potential future digital currencies they issue are fully compatible with the monetary system. existing business”.
However, the collapse of TerraClassicUSD (USTC) and the resulting instability created by the sharp drop in the price of other digital assets could cause investors and other stakeholders to exercise caution when dealing with currencies. digital, notes the report.
The crash of the Terra token (LUNA) and its algorithmic stablecoin made headlines in May this year. Click here to read more about it and what events led up to the accident.
Mary Ann Francis, associate partner at IBM, a US-based IT solutions company, said the CBDC process has taken years to develop, but the risks and consequences associated with it have yet to be fully determined. or defined.
“The rise of CDBC demonstrates the progress being made in adoption by central banks, but this process has taken years and the consequences have yet to be fully determined. Like any or many new payment efforts, regulators and participants engage cautiously and evolve their practices as needed, as the associated risks or impacts have yet to be fully defined,” Francis added.
Are there any CBDC infrastructure challenges? Experts decode
The report notes that several challenges need to be mitigated before digital assets are widely implemented in the system. The main problem is the infrastructure; however, many European countries are currently studying their version of the CBDC. It remains unclear “what infrastructure choices could be made for these coins,” the report says.
Inga Mullins, founder and CEO of blockchain and CBDC payment services company, Fluency, said that currently, “Central and commercial banks are experimenting with a range of technologies, approaches and system architectures, ranging from variations from current digital banking systems to full decentralized systems. systems”.
However, Mullins said it’s reasonable to assume that digital currencies will be “designed from the outset to be fully integrated with existing fiat currency regimes.” Additionally, this integration will need to be made fully transparent early in the CBDC deployment process.
According to Soren Mortensen, Director of Global Financial Markets, IBM, said that a CBDC infrastructure currently exists, as shown by the recent experiences of the Banque de France.
Mortensen added that it has “shown that the new digital world can co-exist with existing market infrastructures like Target2-Securities. The technology is already there to fully integrate these two worlds. Industry adoption is no longer a technology issue, but rather a transformation of the target operating model for financial institutions that still requires additional analysis to determine the cost benefits, as well as the willingness to change directions.
But how the CBDC might be compatible with existing fiat currency is still unclear.
“How, what exactly will happen is still an unresolved design question in Europe. For virtual currencies, this path is a little more obscure; it is unclear how a pseudonymous system can be retroactively made compatible with the regulated monetary system,” added Sointu.
Future Prospects for CBDCs
Cashless Economy: Mortensen pointed to the trend that people are generally moving towards a more digital world with a decline in the use of cash in established economies. He further believes that “digital currencies will grow in importance in a more digital world, and central banks will need to change how they manage their fiat money supply versus the CBDC, as well as how their funds can be converted into more commercial currencies and back.
More use cases: According to Mullins, integration with the CBDC can be achieved in several ways depending on the “specific medium or digital wallets the end user wishes to use for payments.”
He went on to give an example: “For online purchases, integration can be done via plugged-in native mobile or SDKs (software development kits) embedded in the banking app. We also expect to see the introduction of smart electronic cards like today’s credit cards, but with a dedicated chip triggering CBDC transactions.
Mullins also said that as end consumers become more familiar with the technology and benefits of CBDC and incorporate it into their day-to-day activities, “new products and services for commercial and retail users will emerge to take advantage of the architecture of CBDCs. ”
When that happens, he said, “commercial banks will be forced to innovate and improve their level of service if they want to retain those customers. Additionally, there will be a change in AML (Anti-Money Laundering) and regulatory procedures/laws to accommodate the new landscape of CBDCs and ensure that no illicit transactions occur.