RegTech Intelligence 
Advances in digitalisation in recent years have made an impact on all areas of life and the payment sector is no exception. Use of cash has been in decline for years, a trend was only accelerated by the Covid-19 pandemic.
With the majority of commerce no longer dependent upon cash, it’s no surprise that both governments and the private sector are looking for viable alternatives to fiat money.[1] This article recaps the public and private sector currency races underway as we prepare for JWG’s annual conference next month.
The CBDC race
One such addition to cash is Central Bank Digital Currencies (CBDC) – an electronic form of central bank money which has been one of the most suggested options to tackle diminishing use of cash and implications of increasing reliance on a single electronic payment method (cards) that could reduce the resilience of the payments landscape as a whole.[2]
New forms of digital money offer unique potential to unlock innovation and according to Bank of International Settlements, 86 % of central banks are now actively engaging in some form of CBDC work, but no one has advanced as far as Chinese government.
China is one of the leaders in this area as it’s digital currency progress reaches advanced stages, going so far as to have various pilots with more than 10 million user base. In other parts of the globe, Western powers are taking a more cautious approach, as most of the countries are still only evaluating all of the risks and benefits before committing to even the possibility of issuing their own central bank digital currency.
A new digital currency research programme was announced just last month by the ECB, outlining the launch of the next investigation phase of a digital euro project which will last 24 months and aims to address key issues on design and distribution. Previously issues such as privacy, anti-money laundering, limits on digital euro in circulation, were examined as well. [3] This cautious approach is one of the reasons China managed to take the lead in the CBDC race.
Stablecoins and AML concerns
While CBDC is the most popular option for supporting resilience in the changing payments landscape, it’s not the only one. Crypto-currencies, private companies currencies (like the initial version of Facebook Libra) and stablecoins (USDT) are all potential alternatives.[4]
Crypto-currencies have been long used as a means of payment but primarily known as a payment in relation to fraudulent or money-laundering activities such as Silk Road black market.[5]
The recent EU “Anti-money laundering package”, which introduced full application of the EU AML/CFT rules to the crypto sector, could help bring crypto assets into standard regulatory AML framework and make them a more credible means of payment in the eyes of general public and private sector.
This, however, will add an additional layer of challenge for companies and crypto asset providers who were already struggling with implementation of “travel rule”. [6] This is a rule that obliges crypto-asset service providers to collect and make accessible data concerning the originators and beneficiaries of the crypto-asset transfers.
On the other hand, some believe that crypto-currencies are not suitable alternatives to cash as they fail as a store of value and as a fully acceptable and efficient payment instrument due to wild price swings and decentralised nature and should be classified as crypto-assets instead due to their speculative nature.[7] However, one type of crypto-assets – stablecoins, doesn’t have these problems, since the value of stablecoins is tied to one or more other assets, such as a sovereign currency.
Additionally, certain stablecoins claim that they will make possible new forms of online exchange through their 24/7 availability, borderless nature, fractionalisation and integration with non-financial services.[8] These characteristics allowed stablecoins to be proposed as a viable alternative to CBDCs, especially in the US where the international role of the dollar in the global economy could be challenged by foreign CBDCs.[9]
Conclusion
If there is to be a final victor in the cash alternative space it will not be solely determined by the relative efficiency of these solutions but by a number of additional factors including, public opinion, privacy issues, choice of currency potential trading partners are using and all of these issues will need to be carefully thought through as when a market will start to tip towards one of the solutions, it will be very difficult to reverse it.
However, regardless of the winner, new standards and regulations for payments will emerge and need for global collaboration and coordination will be even more pressing.
If you’re interested in learning more about the future of digital payments or wish to get involved in the discussions, then join us at the 6th JWG conference, virtual and on-demand from the 16th to the 17th of November 2021.
[1] https://www.ukfinance.org.uk/system/files/CBDC-report-FINAL.pdf
[2] https://www.bankofengland.co.uk/-/media/boe/files/paper/2020/central-bank-digital-currency-opportunities-challenges-and-design.pdf
[3] https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210714~d99198ea23.en.html
[4] https://www.europarl.europa.eu/cmsdata/238086/Introductory%20statement_Luigi%20Zingales.pdf
[5] https://www.theguardian.com/technology/2020/nov/06/us-seizes-1bn-in-bitcoin-linked-to-silk-road-site
[6] https://ec.europa.eu/commission/presscorner/detail/en/IP_21_3690
[7] https://www.bis.org/review/r210727b.pdf
[8] https://www.bis.org/publ/work905.pdf
[9] https://www.federalreserve.gov/newsevents/speech/quarles20210628a.htm