What form of digital assets will be the future of payments?

Published at: Aug. 7, 2021

We’re living in a time where digital assets are moving towards mainstream adoption. From retail customers to traditional banks and financial service providers, digital assets are on the rise. Many of these assets promised to disrupt financial markets and large incumbents, and while they have received widespread attention, they haven’t quite achieved their potential. That said, large institutions are taking notice — 86% of the world’s central banks are exploring digital currencies, according to a report by the Bank for International Settlements.

They recognize that despite being in a golden age of innovation, payment systems remain somewhat archaic. And so, in my view, there is no reason why current payment systems won’t follow a similar trajectory to industries that have been transformed by new technology in the past decade.

After all, the world we live in is now digital, so it makes sense that money and assets should follow suit. But how realistic is this in the next five years? And will the technology and type of digital assets look the same?

Large organizations beginning their digital assets journey

Institutional interest in cryptocurrencies continues to grow. Goldman Sachs surveyed over 300 of its high-net-wealth clients, finding 40% of them are already exposed to cryptocurrencies. More recently, Banco Bilbao Vizcaya Argentaria (BBVA) — Spain’s second-largest bank — announced it will launch a Bitcoin (BTC) trading service for private banking clients in Switzerland, while Citigroup is considering providing trading, custody and financing services.

Aside from banks, payment firms such as MasterCard and PayPal are getting involved with cryptocurrencies by accepting payments for their customers.

And then there are central bank digital currencies (CBDCs). Infrastructure providers are trying to position themselves as ready for CBDCs. SWIFT and Accenture recently published a joint report which outlined how it could work as a potential carrier of CBDCs, should they become a reality. Furthermore, central banks worldwide are exploring CBDCs and working to safeguard public trust in money and payments. These retail and wholesale CBDCs can do this by offering the unique features of finality, liquidity and integrity, while also providing security. For example, the most promising CBDC design would be tied to a digital identity, requiring users to identify themselves to access funds. This new venture fosters innovation that serves the public interest.

However, it is still the early days of the development of cryptocurrencies, CBDCs and other forms of digital assets. There is a near-unanimous view that these assets need to become more standardized, secure and robust before entering the mainstream.

Regulators taking notice of the change

Over the coming years, digital assets are likely to face intense scrutiny from financial regulators and central banks before they are permitted as a form of secure payment. This is to be expected. Anything that may affect the smooth functioning of the international monetary and financial system will rightly face hurdles by its gatekeepers and those responsible for its operations and security.

For example, the primary global banking standards-setter, Basel Committee on Banking Supervision, has increased capital requirements for banks with exposure to volatile cryptocurrencies to reflect higher risks and financial stability concerns. Under the proposals, banks would be required to hold capital equal to the exposure they face. Therefore, a $100 exposure to Bitcoin would require a minimum capital requirement of $100.

Related: Will regulation adapt to crypto, or crypto to regulation? Experts answer

This could put regulated financial institutions off from getting involved or extending their existing cryptocurrency services. For example, while BBVA has launched trading services into Switzerland, they have held off from other markets as regulations are unclear and not standardized.

That said, not all digital assets would be treated as sternly as cryptocurrencies under these proposals. Stock tokens and stablecoins would fit into modified existing rules on the minimum capital standard for banks, potentially making them a more viable option.

At a crossroads

For now, cryptocurrencies remain volatile, and stablecoins, on the other hand, offer a more secure, transparent and stable option and I am a firm believer in their potential, especially due to their quick settlement speeds. By including data into the coin, money becomes linked to what it pays. This offers a lot of automation possibilities, making it a strong contender.

Perhaps the most likely form of digital assets we will adopt, however, are CBDCs, controlled and issued by central banks. Significant testing has taken place already, and this type of digital asset would ensure strong supply, governance and regulation similar to what we see with fiat currencies today.

For any of these digital assets, buy-in among end-users — large corporations, SMEs and individual consumers — will be crucial to determining success. And success will ultimately be measured in decades, not years.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Laurent Descout is the co-founder and CEO of Neo, a European B2B neobank headquartered in Barcelona. He is a serial fintech entrepreneur and investor and has been a financial advisor in asset finance for more than 10 years. He holds a master's degree in banking, finance and insurance from Paris Dauphine and the Investment Advice Diploma in Derivatives from the Chartered Institute for Securities & Investment.