Imagine a scenario where you need different messengers to send different types of messages – for example WhatsApp for text messages, Viber for audio, Telegram for video, etc. Rather inconvenient, right? But that’s exactly what happens in finance: there is no way to send both digital fiat money and cryptocurrency from a bank account without additional steps. It doesn’t affect the masses yet, but after the issuance of national digital currencies or central bank digital currencies around the world for the next few years, the situation will soon become more complicated. We must now look for a solution.
CBDCs require a multi-format framework
The traditional financial system can no longer do away with new technologies. According to the Cambridge Center for Alternative Finance, the number of cryptocurrency users almost tripled from 35 million in 2018 to 101 million in the third quarter of 2020. Another study conducted by researchers from the UK’s Financial Conduct Authority found a 78% increase since 2019.
Cryptocurrency operations are profitable. In the fourth quarter of 2020 alone, PayPal increased the number of transactions by 36%, which corresponds to a value of around $ 277 billion. The surge began in the third quarter of 2020 when the company launched crypto transactions. This is one of the best quarterly returns in PayPal history.
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However, the central bank’s digital currencies will become a part of our daily lives in three to five years. And we need a completely new infrastructure for the general introduction. China was the first country to actively promote its digital yuan project – called DCEP (Digital Currency Electronic Payment). China is fully focused on infrastructure as several local banks have already developed or are developing their own e-wallets – the main tool for working with DCEP.
Connected: China is accelerating the release of CBDC and testing the infrastructure before accepting it
So far, the Chinese digital yuan is the only example of digital money issued by central banks that actually works. In particular, more than 60 central banks around the world are considering this opportunity. DCEP is based on centralized blockchain technology that is fully managed by the Chinese central bank. This technology makes it possible to gain complete control over all financial transactions, ensure alignment with social spending, increase tax collection and prevent financial crime.
The international payment system Visa recently introduced a protocol for offline transactions with digital currencies from the central bank. To pay or accept payments offline, all you need to do is download a mobile application. In this case, CBDCs essentially replace cash, which leads to an increase in the number of transactions controlled by the issuer, bank or financial intermediary.
The multi-format monetary framework is soon becoming a requirement for financial instruments. Banks need to ensure that fiat, CBDC, and crypto transactions can be conducted in one place: a banking application. But there is a catch: the new formats have nothing in common with their predecessors. In addition, governments consider the introduction of CBDCs to be autonomous. In other words, it does not follow a uniform standard with neighboring countries.
What stands in the way of combining “old” and “new” money?
Cryptocurrencies and CBDCs are relatively new. So there is a great deal of uncertainty about these financial instruments. That being said, fiat and digital money share functions, and the method and quality of their implementation will affect how the multi-format financial solution is created.
Building a multi-format financial solution requires a unified approach to compliance. If each service carries out anti-money laundering checks for CBDC and cryptocurrency transactions according to its own policy, the bank on the receiving end does not confirm them.
Individuals who are not deeply involved with crypto may think that digital assets cannot be integrated into traditional business processes. But that is not true. Our experience shows that there is a need to develop a unified approach to compliance – the same for traditional fiat and crypto. The public denigration of all owners of digital assets stands in the way.
In addition, the tools in crypto financing with AML are significantly more effective than in the traditional system. For example, Know Your Transaction procedures can display the entire transaction history for a given cryptocurrency – from the time the token was created to when it was sent to the user’s wallet, including everything in between.
Versatility is getting more and more difficult
The differences between “old” and “new” money shown above are just a few examples, but they are so significant that we cannot foresee the seamless use of different forms of money. For this reason, compatibility between them is particularly important for many banks and fintech service providers.
We are entering a new era for many financial intermediaries of all shapes and sizes. They will serve their own niche, combining different types of e-money, CBDCs, and cryptocurrencies with a variety of services. For example, Visa cards already support Fiat, Crypto, Precious Metals and Bitcoin (BTC) cashback.
If companies and individuals can choose between different types of money / currencies / payment systems, only those financial institutions can be considered universal banks that can work simultaneously with a variety of formats and services.
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Alex Axelrod is the founder and CEO of Aximetria and Pay Reverse. He is also a serial entrepreneur with over a decade of experience in leading technology roles. He was director of big data at JSFC AFK Systems’ research and development center. Prior to this position, Alex worked for Mobile TeleSystems, the largest telecommunications provider in Russia, where he led the development of anti-fraud and cybersecurity systems.