We live in an age where digital assets are moving towards widespread 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 major incumbents, and although they received wide attention, they did not quite reach their potential. That said, large institutions are taking note – 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 opinion, there is no reason why current payment systems cannot follow a similar trajectory to industries that have been transformed by new technologies over the past decade.
After all, the world we live in is now digital, so it makes sense for money and assets to follow suit. But how realistic is that in the next five years? And will the technology and type of digital assets be alike?
Related: Crypto is the next step towards a cashless society
Large organizations are starting their journey to digital assets
Institutional interest in cryptocurrencies continues to grow. Goldman Sachs surveyed over 300 of its high net worth clients and found that 40% of them are already exposed to cryptocurrencies. More recently, Banco Bilbao Vizcaya Argentaria (BBVA) – Spain’s second-largest bank – announced that it will launch a Bitcoin (BTC) trading service for private banking clients in Switzerland, while Citigroup plans to provide services. trading, custody and financing.
Besides banks, payment companies such as MasterCard and PayPal are involved in cryptocurrencies by accepting payments for their customers.
Related: Can’t you beat them? Join them: Mastercard and Visa advocate for Bitcoin
And then there are central bank digital currencies (CBDCs). Infrastructure providers are trying to position themselves as being CBDC ready. SWIFT and Accenture recently released a joint report outlining how this could work as a potential CBDC carrier, if they become a reality. In addition, central banks around the world are exploring CBDCs and working to preserve public confidence in money and payments. These retail and wholesale CBDCs can do this by providing the unique characteristics of purpose, liquidity and integrity, while providing security. For example, the most promising CBDC design would relate to a digital identity, requiring users to identify themselves to access funds. This new company promotes innovation in the service of the public interest.
Related: Have CBDCs affected the crypto space in 2020, and what’s next in 2021? Expert response
However, this is still only the early days of the development of cryptocurrencies, CBDCs, and other forms of digital assets. There is an almost unanimous view that these assets need to become more standardized, secure and robust before they enter the mainstream.
Regulators take note of the change
Over the next few years, digital assets are likely to come under scrutiny from financial regulators and central banks before they are permitted as a form of secure payment. This is to be expected. Anything that can affect the proper functioning of the international monetary and financial system will rightly encounter obstacles on the part of its custodians and those responsible for its operations and security.
For example, the world’s leading banking standards body, the Basel Committee on Banking Supervision, has increased capital requirements for banks exposed to volatile cryptocurrencies to reflect higher risks and financial stability concerns. . According to the proposals, banks would be required to hold capital equal to the exposure they are facing. Therefore, a $ 100 exposure to Bitcoin would require a minimum capital requirement of $ 100.
Related: Will regulation adapt to crypto, or crypto to regulation? Expert response
This could prevent regulated financial institutions from getting involved or expanding their existing cryptocurrency services. For example, while BBVA has launched trading services in Switzerland, they have steered clear of other markets because regulations are unclear and unstandardized.
That said, not all digital assets would be treated as harshly as cryptocurrencies under these proposals. Stock tokens and stablecoins would fit into existing modified rules on the minimum capital requirement for banks, potentially making them a more viable option.
Related: Stablecoins presents new dilemmas for regulators as mass adoption looms
At a crossroad
For now, cryptocurrencies remain volatile and stablecoins, on the other hand, offer a more secure, transparent and stable option and I strongly believe in their potential, not least because of their fast settlement speeds. By including data in the play, the money becomes tied to what it pays. This offers a lot of possibilities for automation, which makes it a serious competitor.
However, perhaps the most likely form of digital asset we will embrace is CBDCs, controlled and issued by central banks. Significant testing has already taken place, and this type of digital asset would ensure strong supply, governance and regulation, similar to what we see today with fiat currencies.
For each of these digital assets, buy-in from end users – large companies, SMEs and individual consumers – will be crucial in 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 do their own research before making a decision.
The views, thoughts and opinions expressed here are those of the author 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 based in Barcelona. He is a serial fintech entrepreneur and investor and has been an asset finance financial advisor for over 10 years. He holds a Master’s degree in banking, finance and insurance from Paris Dauphine and a Diploma in Derivatives Investment Consulting from the Chartered Institute for Securities & Investment.