CBDCs and Big Tech present opportunity for banks to embrace crypto

Cypherium and Boston Consulting Group (BCG) have released a joint white paper finding that banks should potentially embrace crypto payments amid the emergence of Central Bank Digital Currencies (CBDCs) and evolving competition from Big Tech companies.

As other private-sector payment solutions are ready to take on the e-commerce sector; and with CBDC development well underway, global payment infrastructure looks set for a potentially significant evolution.

According to the Cypherium-BCG research paper, commercial banks have an opportunity to place themselves in a position of greater trust to take over the distribution function of money by increasingly embracing digital assets.

The prospect of a lack of oversight on monetary policy or control over the supply of privately issued coins has galvanised global efforts to formulate Central Bank Digital Currencies (CBDCs) around the world. Per a Bank for International Settlements (BIS) study, 60% of the world’s largest central banks are conducting experiments or actively developing a CBDC.

Meanwhile, the solutions offered by Big Tech companies operate seamlessly across multiple devices, apps, shops, and continents — meaning transactions can be performed worldwide instantly, with nominal fees and direct verification.

According to the White Paper, banks should get ready for the new era of decentralised finance (DeFi) by preparing the technology to maintain and exchange cryptocurrencies and CBDCs; integrating new crypto front-to-back infrastructure; updating anti-money laundering and chain verification; and exploring adjacent technologies and developments.

“Banks have several advantages over CBDCs and Big Tech. In regards to CBDCs, it’ll take time for central banks to create a robust system and scale consumer adoption,” says Sky Guo, CEO at Cypherium.

“As banks already have the customers and the scale, they can catch up by upgrading their legacy systems. It’s integral that banks focus on facilitating crypto custodian services, crypto transactions, crypto, and chain verification, or else they could risk disintermediation.”

The White Paper also highlights key challenges hindering CBDC adoption relating to privacy, interoperability, cybersecurity, and offline payments.

For instance, cash is usually anonymous and untraceable, whereas digital payments are fully visible to the processor.

A CBDC will need to find a balance between meeting regulatory requirements and protecting user privacy.

Additionally, with identity theft and fraud continuing to rise every year, creating effective safeguard mechanisms is crucial for CBDCs.

And processes need to be in place for victims of theft to reclaim their funds efficiently.

The research also states that CBDC systems will need to offer the same level of convenience as cash for offline transactions in case internet access isn’t immediately available to the user.

However, the most significant hurdle to adoption is a lack of interoperability between sovereign CBDCs. Due to the regulatory and safety requirements, CBDCs are designed as closed and centralised systems.

As such, they remain unable to talk to external systems, including other CBDCs payment platforms or internal legacy banking and enterprise systems. One solution to this is adopting a common communication data format (e.g., ISO 20022), using a trusted intermediary, or adopting public blockchains.

A CBDC Global tracker is available HERE

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