Cybersecurity North America

The Cashless Society: Central Bank Digital Currencies and Cryptocurrencies

With 2020 accelerating many trends in the financial industry, one topic that has come into focus are Central Bank Digital Currencies (CBDCs) and cryptocurrencies, with the rise in digital banking platforms making them of particular interest.

Michael Magrath is the Director of Global Regulations and Standards at OneSpan, a cybersecurity company based in Chicago. He is responsible for aligning OneSpan’s solution roadmap with standards and regulatory requirements globally.

Here Michael shares his thoughts around Central Bank Digital Currencies and cryptocurrencies.

Michael Magrath, Director, Global Regulations and Standards, OneSpan

The year 2020 has accelerated many trends within the financial services sector. As well as forcing businesses to rapidly adapt their operations, the Covid-19 pandemic has driven governments and industry bodies around the world to enact laws, policies and regulations that enable digital and remote commerce.

One area that has come into focus is Central Bank Digital Currencies (CBDCs) which, along with cryptocurrencies, is now garnering more attention than ever before from lawmakers. As adoption continues to grow in the consumer world, many governments are starting to look to these technologies to see what they might add to the current financial sector.

The main driver has of course been a period of unparalleled disruption. Over the course of this year, we’ve seen the massive growth of digital banking platforms – out of necessity as much as desire. Banks and financial institutions (FIs) have had to quickly shift services onto the online realm to maintain business continuity, which has resulted in new and refreshed conversations around the possible uses of CBDCs and cryptocurrencies.

While this is an ongoing process, industry bodies and governments alike are seeking to establish regulations and guidance that will shape the future of these technologies.

The state of play

Taking a global view, we can see how the level of attention going into cryptocurrency-related regulations varies between regions. For example, although no timeframe has been announced as to whether plans will move forward, the US Federal Reserve has been conducting research into the development of a US CBDC. Similarly, the Bank of Canada announced that it is developing its own CBDC and is now at a stage of advanced trials i. Its focus in this area was highlighted over the summer, when it issued a set of comprehensive staff analytical notes examining the design, security, privacy and use of CBDCs.

In Europe, digital currencies and cryptocurrencies have garnered plenty of attention from regulators. Member states were required to transpose the 5th Anti-Money Laundering Directive (AMLD5) into national law by the beginning of the year, with one of the directive’s key provisions focused on restricting the anonymous use of virtual currencies, while the UK has outlined its own plans for a CBDC and Russia’s law on digital financial assets was signed in July.

In APAC, Japan is being particularly progressive. Its Financial Services Agency amended two separate acts to strengthen crypto asset investor protection and promote crypto asset investment. The new regulations primarily focus on regulating crypto exchanges, custodians, and products; reforming existing virtual currency terminology; and creating appropriate transaction measures.

However, not all regions are as ready to embrace cryptocurrencies. Although certain countries in the Middle East are modernising their systems and putting new regulations in place, many nations still have cryptocurrency concerns. Qatar’s financial centre regulatory authority even went as far as to issue an outright ban on it in 2020.

Clearly, regions and individual countries are at various stages of maturity with regards to CBDCs and cryptocurrencies, resulting in a somewhat fragmented landscape that will take time to settle. But, taking a step back, what do these regulatory developments mean for the future of financial services and what benefits can these technologies provide?

The next payment evolution?

The growing focus on CBDCs and cryptocurrencies from lawmakers reflects a wider shift we’re seeing in the financial sector towards a cashless society. Take the UK as an example. contactless card payments accounted for 19% of all payments in 2019 and this proportion is predicted to double in the next decade. By 2024, debit cards are forecast to account for half of all payments in the UK, as the use of cash continues to decline. Indeed, the proportion of payments that involve cash has more than halved to 28% over the past decade.

The use of cryptocurrencies represents a logical next step in this ongoing shift, which is why so many governments and authorities around the world are paying close attention. And, although cryptocurrencies have, in their brief history, been used for illegal activities, they offer plenty of benefits for the legitimate global financial sector.

For example, cryptocurrencies and their regulations can actually help improve security and increase transparency. Blockchain, the underlying technology on which cryptocurrencies are built, provides an immutable and verifiable public record of transactions that is decentralised instead of being controlled by one body or organisation. This technology can also be used to build a shared log for identity verification, which could help financial institutions comply with the customer due diligence (CDD) aspect of anti-money laundering regulations.

And CBDCs offer benefits of their own. With the potential to transform the way people store and exchange their money, they could make payments faster and cheaper as the use of cash continues to decline.

Amidst the current disruption and technological development around the word, it’s no surprise to see more and more governments laying the foundations for CBDCs and cryptocurrencies. It’s becoming increasingly clear that these technologies will have a vital role to play as the financial sector continues to evolve and, although many regulations are still in their early stages, this is something that will certainly continue into 2021 and beyond.

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