Navigating the future of digital money
28 May 2024
Industry experts talk to Sophie Downes about why we need digital currency and what work needs to be done by the industry to implement it
Image: stock.adobe.com/Maksim Kabakou
If the shift from credit cards to smart wallets and cryptocurrency tells us anything, it is that digital forms of money are changing.
Digital currencies are not a wholly new concept; as consumers, we pay with digital money all the time. If we forget our credit card, we also have the option of our Apple watches, or smart wallets — transactions that relegate cash to something rather antiquated and awkward.
“This generation doesn't interact or pay like our parents. They don't transact like our parents. So why would they want to make the payments that our parents used?” poses Jovi Overo, director at BaaS, Unlimit.
Yet, the impetus in the finance industry is to move beyond this even further. The new orders of the day are stablecoins, central bank digital currencies (CBDCs), and the possibility of a central bank-backed digital Euro, offering further possibilities for both the retail and wholesale sides of the financial ecosystem.
Amid the buzzwords and excitement, it is important to ask the question: why do we need these digital currencies, and what work has to be done within the industry to adopt them?
Possibilities
An obvious benefit to digital currency is its efficiency.
“We are in a global world that is very fast moving,” says Overo. “That also extends the need to make quicker payments, to have instant settlements, and to increase speed efficiencies. That is a huge advantage right now for any organisation that can deliver it.”
He is well positioned to comment on this space. Unlimit’s BaaS solution — Overo’s self-proclaimed pride and joy — enables any business or brand to offer financial services to their consumers.
Overo’s role is multifaceted, spanning business development, products and marketing. “It's a challenge,” Overo admits, “and I enjoy that”. His enthusiasm even extends to the t-shirt he wears, on which ‘Borderless Possibilities' is emblazoned.
The word ‘possibility’ reverberates within this discussion, reflecting an industry that is still investigating what forms digital currencies might take.
Such thought is central to the work of the Digital Pound Foundation, a trade association working with banks, non-member firms and other trade associations, to develop an ecosystem and community around digital money.
“There's a perception that money and payments are digital — but what they aren't is digitally native,” explains Jannah Patchay, policy and strategic lead at the Digital Pound Foundation.
Like Overo, she places a significant focus on the possibilities that digital currency brings to the industry, particularly in overcoming the current inefficiencies that traditional financial systems may operate with.
She adds: “It gives us the opportunity to tear up all of the assumptions that we currently have around constraints on money and payments, and look at the requirements of what we need in terms of settlements now, and in the future.”
Stablecoins and CBDCs
As highlighted by Securities Finance Times coverage of the Digital Assets Forum in April 2024, the various forms of digital currency are subject to much debate and scrutiny.
The forum covered the various use cases of digital money across retail and wholesale centres, as well as highlighting inherent challenges in adoption. What quickly became evident was the vast amount of work needed across the industry to actually make these changes happen.
As a participant at one such panel, Overo provoked discussion by advocating for the use of stablecoins over CBDCs. Admitting to being in the minority, he expands upon his point in our call: “For me, stablecoins are not just a preference, but a strategic choice.”
He describes how CBDCs are still fundamentally tied to traditional infrastructures and regulatory challenges, while stablecoins provide flexibility and rapid deployments. As the name suggests, they also pose a more stable alternative. Since they can be pegged to a currency like the US dollar, or to the price of a commodity such as gold, they offer more anchored options, particularly compared to volatile crypto markets.
Ultimately, however, Overo is strategic. “When you look at the option of CBDCs versus stable coins, it's all about using the right tool for the right job — with scalability and adaptability in mind.”
In contrast, Patchay describes the Digital Pound Foundation as “very neutral” in this debate.
“We see both CBDCs and private issuances such as stablecoin coexisting in the future, along with tokenised deposits; all of them will have a role to play in a future ecosystem of digital money,” she comments.
Elaborating on the varied opinions of market players, she touches on the politics of digital currency within the financial sphere: “I think that a lot of the arguments are driven by — on all sides — preconceptions, and inherent beliefs about the others.”
She explains the potential dynamics at play between market players: stablecoins and CBDCs facing potential scepticism from banks; stablecoin issuers perceiving banks as adding levels of intermediation and obfuscation; on the retail side, Patchay highlights the genuine concerns consumers hold around privacy and control.
“On the wholesale side, there are much stronger and clearer arguments for introducing a CBDC,” Patchay argues, predicting it might happen in the near to medium term. But, as for the differences in opinions, “it just depends on who you talk to”.
Post-trade
Writing for a securities finance magazine, I was curious to see Patchay’s opinion on the impact of digital currencies on the post-trade process.
Her take — it will be profound.
She discusses the impact on various places in the settlement cycle, using the example of a bank’s treasury function. “If your business model or function is predicated on sourcing liquidity, and taking advantage of gaps in the settlement cycle to meet your liquidity needs, instantaneous settlements create significant challenges to that,” she explains. “They will need to have the assets available in order to trade and settle in real time.”
This can be expanded into securities finance in particular. With repo and securities lending currently operating within a T+2 settlement cycle in Europe, there is a two day gap where lenders can find liquidity.
“When you have that instant settlement, there is a question of what will happen to those markets?” observes Patchay.
The question of digital technologies on settlement is not a new discussion. In a talk titled ‘Innovation in post-trade services’ at the AFME conference in 2022, Sir Jon Cunliffe, former governor at the Bank of England, highlighted the benefits of new technologies. These included fewer fees, due to the smaller number of intermediaries, and a shorter and simplified chain structure.
Nonetheless, the focus on regulation was paramount. ”Given the range of policy questions — regulatory, supervisory and legal — that these developments raise, market infrastructure regulators will need to step up their engagement,” he stated.
Two years on, the industry has seen developments in DLT and blockchain, notably with the Digital Securities Sandbox and the Innovation Hub’s Project Meridian. However, stablecoins and CBDCs remain debated.
However, as Cunliffe somewhat aptly pointed out: “We should not classify new ways of doing things as dangerous simply because they are different.”
Timeline
When can we expect these currencies to be realised? The answer lies in the process.
Patchay advocates for a meticulous and unhurried process of adoption. Comically highlighting the historical challenges the UK has faced in delivering large infrastructure projects, she emphasises the need for diligence: “when you do it, you want to get it right.”
“The benefit is not about primarily displacing existing payments and infrastructure,” she continues. “It's about providing a platform for innovation in the future, and the future foundations of financial market infrastructure. This isn’t something you want to rush into, as a central bank, but is this something that you want to be actively exploring.”
To achieve this, Overo agrees, preparation is paramount. “It needs to be interoperable, and there needs to be a very vast advance in regulatory clarity, as well as education.” He details the fine balance between regulation and innovation, and highlights the need to provide a clear legal framework for operations in order for implementation to be possible.
However, it is education that he sees as the fundamental driver of these currencies. “Educating users about the benefits and the operations of digital money is absolutely key to accelerate adoption,” he remarks.
“It’s going to be a team effort — and we’ll all play a part.”
Digital currencies are not a wholly new concept; as consumers, we pay with digital money all the time. If we forget our credit card, we also have the option of our Apple watches, or smart wallets — transactions that relegate cash to something rather antiquated and awkward.
“This generation doesn't interact or pay like our parents. They don't transact like our parents. So why would they want to make the payments that our parents used?” poses Jovi Overo, director at BaaS, Unlimit.
Yet, the impetus in the finance industry is to move beyond this even further. The new orders of the day are stablecoins, central bank digital currencies (CBDCs), and the possibility of a central bank-backed digital Euro, offering further possibilities for both the retail and wholesale sides of the financial ecosystem.
Amid the buzzwords and excitement, it is important to ask the question: why do we need these digital currencies, and what work has to be done within the industry to adopt them?
Possibilities
An obvious benefit to digital currency is its efficiency.
“We are in a global world that is very fast moving,” says Overo. “That also extends the need to make quicker payments, to have instant settlements, and to increase speed efficiencies. That is a huge advantage right now for any organisation that can deliver it.”
He is well positioned to comment on this space. Unlimit’s BaaS solution — Overo’s self-proclaimed pride and joy — enables any business or brand to offer financial services to their consumers.
Overo’s role is multifaceted, spanning business development, products and marketing. “It's a challenge,” Overo admits, “and I enjoy that”. His enthusiasm even extends to the t-shirt he wears, on which ‘Borderless Possibilities' is emblazoned.
The word ‘possibility’ reverberates within this discussion, reflecting an industry that is still investigating what forms digital currencies might take.
Such thought is central to the work of the Digital Pound Foundation, a trade association working with banks, non-member firms and other trade associations, to develop an ecosystem and community around digital money.
“There's a perception that money and payments are digital — but what they aren't is digitally native,” explains Jannah Patchay, policy and strategic lead at the Digital Pound Foundation.
Like Overo, she places a significant focus on the possibilities that digital currency brings to the industry, particularly in overcoming the current inefficiencies that traditional financial systems may operate with.
She adds: “It gives us the opportunity to tear up all of the assumptions that we currently have around constraints on money and payments, and look at the requirements of what we need in terms of settlements now, and in the future.”
Stablecoins and CBDCs
As highlighted by Securities Finance Times coverage of the Digital Assets Forum in April 2024, the various forms of digital currency are subject to much debate and scrutiny.
The forum covered the various use cases of digital money across retail and wholesale centres, as well as highlighting inherent challenges in adoption. What quickly became evident was the vast amount of work needed across the industry to actually make these changes happen.
As a participant at one such panel, Overo provoked discussion by advocating for the use of stablecoins over CBDCs. Admitting to being in the minority, he expands upon his point in our call: “For me, stablecoins are not just a preference, but a strategic choice.”
He describes how CBDCs are still fundamentally tied to traditional infrastructures and regulatory challenges, while stablecoins provide flexibility and rapid deployments. As the name suggests, they also pose a more stable alternative. Since they can be pegged to a currency like the US dollar, or to the price of a commodity such as gold, they offer more anchored options, particularly compared to volatile crypto markets.
Ultimately, however, Overo is strategic. “When you look at the option of CBDCs versus stable coins, it's all about using the right tool for the right job — with scalability and adaptability in mind.”
In contrast, Patchay describes the Digital Pound Foundation as “very neutral” in this debate.
“We see both CBDCs and private issuances such as stablecoin coexisting in the future, along with tokenised deposits; all of them will have a role to play in a future ecosystem of digital money,” she comments.
Elaborating on the varied opinions of market players, she touches on the politics of digital currency within the financial sphere: “I think that a lot of the arguments are driven by — on all sides — preconceptions, and inherent beliefs about the others.”
She explains the potential dynamics at play between market players: stablecoins and CBDCs facing potential scepticism from banks; stablecoin issuers perceiving banks as adding levels of intermediation and obfuscation; on the retail side, Patchay highlights the genuine concerns consumers hold around privacy and control.
“On the wholesale side, there are much stronger and clearer arguments for introducing a CBDC,” Patchay argues, predicting it might happen in the near to medium term. But, as for the differences in opinions, “it just depends on who you talk to”.
Post-trade
Writing for a securities finance magazine, I was curious to see Patchay’s opinion on the impact of digital currencies on the post-trade process.
Her take — it will be profound.
She discusses the impact on various places in the settlement cycle, using the example of a bank’s treasury function. “If your business model or function is predicated on sourcing liquidity, and taking advantage of gaps in the settlement cycle to meet your liquidity needs, instantaneous settlements create significant challenges to that,” she explains. “They will need to have the assets available in order to trade and settle in real time.”
This can be expanded into securities finance in particular. With repo and securities lending currently operating within a T+2 settlement cycle in Europe, there is a two day gap where lenders can find liquidity.
“When you have that instant settlement, there is a question of what will happen to those markets?” observes Patchay.
The question of digital technologies on settlement is not a new discussion. In a talk titled ‘Innovation in post-trade services’ at the AFME conference in 2022, Sir Jon Cunliffe, former governor at the Bank of England, highlighted the benefits of new technologies. These included fewer fees, due to the smaller number of intermediaries, and a shorter and simplified chain structure.
Nonetheless, the focus on regulation was paramount. ”Given the range of policy questions — regulatory, supervisory and legal — that these developments raise, market infrastructure regulators will need to step up their engagement,” he stated.
Two years on, the industry has seen developments in DLT and blockchain, notably with the Digital Securities Sandbox and the Innovation Hub’s Project Meridian. However, stablecoins and CBDCs remain debated.
However, as Cunliffe somewhat aptly pointed out: “We should not classify new ways of doing things as dangerous simply because they are different.”
Timeline
When can we expect these currencies to be realised? The answer lies in the process.
Patchay advocates for a meticulous and unhurried process of adoption. Comically highlighting the historical challenges the UK has faced in delivering large infrastructure projects, she emphasises the need for diligence: “when you do it, you want to get it right.”
“The benefit is not about primarily displacing existing payments and infrastructure,” she continues. “It's about providing a platform for innovation in the future, and the future foundations of financial market infrastructure. This isn’t something you want to rush into, as a central bank, but is this something that you want to be actively exploring.”
To achieve this, Overo agrees, preparation is paramount. “It needs to be interoperable, and there needs to be a very vast advance in regulatory clarity, as well as education.” He details the fine balance between regulation and innovation, and highlights the need to provide a clear legal framework for operations in order for implementation to be possible.
However, it is education that he sees as the fundamental driver of these currencies. “Educating users about the benefits and the operations of digital money is absolutely key to accelerate adoption,” he remarks.
“It’s going to be a team effort — and we’ll all play a part.”
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