Who will beat who in the future struggle for digital currencies? This is a race with many players including central banks, and private players offering a broad range of products. Stable cryptocurrencies that are linked to the dollar and euro through to official state currencies. At the Globes Tech IL Conference, KPMG Israel financial risk management and insurtech lead Ilanit Adesman and KPMG Israel head of fintech payments, risk and compliance Ofer Golan provided an insight into this dramatic race.
Adesman said, “When we talk about CBDC, a central bank digital currency for the retail market like the digital shekel, we are asked the question as to why we need it?”
Golan explained that first of all this is a solution for people that do not have any access to the banking system today. “There are 1.5 billion people around the world that do not have any access to a bank. Digital currencies have ad vantages like speed with which they can close a deal and reduce the number of intermediaries in the payment chain. In traditional systems, completing a deal might take five days, and it depends among other things on the amount and the location in which it is implemented.”
He adds that another advantage is reduced costs for the transaction. “Normally, an intermediary takes a commission for the transaction, which increases costs. The new technology should bring both improved speed and lower costs. In addition, in the current payment system, a transaction is one or zero. But in digital currency, there is the ability to program the transaction so that it allows for smart contracts and conditions for the execution of the transaction. With digital currency, even if I did not receive a salary and I am obligated to pay some kind of payment, it is possible to create conditions for making the payment.”
Not everyone is satisfied
Adesman pointed out that digital currencies have already stirred up ‘riots’ in recent years. “Five years ago, Facebook announced that it would come out with its own digital currency called ‘Libra.’ Fintech and large entities are a threat from their point of view. There is also competition from the cryptocurrency companies, and they see the usefulness of the various currencies. Today there is a rating by S&P for the strength of stablecoins issued by private entities.”
So what are the benefits of digital currencies issued by central banks beyond reducing costs and increasing accessibility? According to Adesman, “The digital currency (CBDC) provides stability because a central bank is behind it.” She added that another key element is the prohibition of money laundering. “Today, we as consumers are required to go through a process of prohibiting money laundering every time we open a bank account. One of the advantages of the digital shekel is that the payment provider will do the process of prohibiting money laundering once, and then the financial institutions will be able to rely on it. This is a significant advantage.”
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Cybersecurity and privacy risks
Among the many advantages of digital currencies, there are also quite a few risks. They note two main ones. “One of the most significant is the cybersecurity risk,” Adesman said. “Until today, it has not been announced what the technology of the digital shekel will be, and there is a reason for that. We are waiting to see what technology the central banks of the EU and US will choose, so that the currencies communicated with each other. The ability to transfer the digital shekel between countries is critical.
“When they started talking about a central bank’s digital currency, they thought it would be a type of blockchain (the distributed network for transactions in digital currencies). Maybe yes and maybe no. The European Central Bank is due to announce by the end of the year what the technology will be. So far, blockchain technology has not been hacked, so it has a good chance of winning.”
Another risk Adesman mentions is that governments could become a big brother. “One of the countries that first adopted the digital currency is China. It allows the government to deduct tax automatically for every transaction. This raises a good question if accountants will be needed later, because everything will be recorded in the digital ledger. Another question is what will this do to the banks’ liquidity? There will probably be a restriction on an amount (for digital shekel deposits) so as not to harm them.”
For his part Golan, recalls an incident two years ago that illustrates part of the dangers. “There is a certain element of volatility,” he says. “There were difficult events two years ago in the Terra Luna currency, which was a stablecoin based on another currency. There was currency fluctuation and people lost billions. Until a year ago, there was no clear regulation, but the world is moving forward and today there is a dedicated regulation for stablecoins. There is an understanding that they want to move forward to institutionalize the process, and make the private companies do things properly.”
Central bank or private company
Golan added, “The main difference between CBDC and stablecoin is that the latter is issued by private companies. Today 60% of the traffic in the blockchain is in stablecoins. More technological developments are carried out on stablecoins. It should be noted that although it is called a stablecoin, its value can fluctuate slightly above or below or the value of the base asset, such as the dollar for example.”
Golan also stated his expectations of a future digital currency. “I expect the payment to reach the other party quickly regardless of what standard the other side has. When I send a digital currency, I want it to be received quickly at the other end.”
So who will win the digital battle – the currencies of the central banks or the stablecoins of the private companies? Adesman says unexpectedly, “It is possible that we will remain in the current (traditional) payment systems. The competition from the digital currency and the stablecoin is causing the payments market to change and try to become immediate. The international SWIFT clearing house is expected to become more immediate at the end of 2025. So the concealed hand of the market will probably decide.”
Full disclosure: The Conference was sponsored by One Zero Bank, Microsoft, HP Indigo, KPMG, AT&T, and Mekorot and with the participation of the Israel Innovation Authority.
Published by Globes, Israel business news – en.globes.co.il – on April 16, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.
