Finance Monthly September 2021 Edition

12 www.finance-monthly.com FRONT COVER FEATURE - DIGITAL CURRENCIES large institutions, shows there’s a clear trend. Financial portfolios should no longer be cash, bonds or equities – a small exposure can be digital. For me, this coupled with the concept of digital Pounds, Euros, Dollars or Yen, signals it’s time for banks to start thinking at the very least what measures should be put in place to lay the foundations for adoption. Surely commercial entities could benefit from showing customers they’re ready to take action, and providing an alternative to investment platforms as a source and store of these assets? But what’s required? Here are five key aspects which can help determine a starter strategy. 1. System resilience Like any fiat system, digital currencies would need to be considered critical national infrastructure – meaning uptime and defence are impenetrable 24/7, 365 days per year. Aside from this requirement, the new system would need to be protected from cyberattacks, whilst also handling high volumes of transactions. Systems should be able to process transactions immediately (or as instantaneously as possible) along with having strong privacy protections. digital version of cash, if they will eventually replace cash or just simplify cross-border payments – but the fact of the matter is cash appears to be becoming digital, meaning banks need to get ready, even if the day-to-day reality could be years away. Taking a step back from this new development, it’s fair to say financial services was already in flux, with the pandemic turbo- charging many of these shifts. Previously, banks, building societies, pension providers and wealth management had defined roles within the market, and whilst there was some interaction between the providers, people had their pots of money and tended not to move them around. In short, loyalty mattered. But this, likemany other aspects of financial services has now changed. New entrants are flooding the market and offering platforms that bring vendors together thanks to Open Banking enablement. Therefore, consumersarefloodedwithchoice. It’s now simple to amalgamate pensions or to transfer ISAs to get a better rate. Plus, with digitalisation, self-service is now positively encouraged. One clear example being online brokerages disrupting the investment space and allowing consumers to own snippets of companies, instead of requiring payment for full shares. Consumers are used to a digital financial life – so why not extend this to currency? No matter where a company sits within financial services, it’s clear that if digital currencies become reality, firms will need to accept them, which throws up multiple issues. Integration with fiat currency is perhaps the most pressing. However, the growth of cryptocurrencies over the last five to ten years and their recent acceptance by For banks looking to support and facilitate a lot of this traffic, leveraging blockchain seems the most logical choice, as the roles they will play in these transactions will be different to a normal transfer. Whilst money may well flow from one account to another, banks will also likely be responsible for updating the record of who owns which Central Bank Digital Currency (CBDC) balance. Of course, technicalities are still to be worked out as to how money will move around, but it’s likely the CBDC itself would be a cash-like claim on the central bank. This way, the central bank avoids the operational tasks of opening accounts and administering payments. Banks can continue to perform retail payment services, meaning there are no balance sheet concerns with private sector intermediaries. This in turn helps boost operational resilience, as this architecture allows the central bank to operate backup systems in case the private sector runs into technical outages. 2. IT infrastructure The potential introduction of digital currencies will be a testing experience for many – especially while we don’t know if it will To enable peer-to-peer transactions, digital currencies will need to make use of centralised governance frameworks that are authoritarian in nature — i.e., controlled by a single body.