digital innovation

Facebook's Libra Sparked CBDC Race, COVID-19 Made Central Banks Realize Its Necessity

Digital innovation has been accelerated during the ongoing coronavirus pandemic, and this trend has served to propel central bank digital currency (CBDC) pilots forward.

During this year’s virtual hosting of Hong Kong Fintech Week, keynote speaker and professor at the University of Hong Kong Douglas Arner discussed key factors that served to accelerate CBDC adoption in today’s economic climate.

With the evolution of technology, digital payments have been on the rise. As technology has increasingly been leveraged “to support a revolution in monetary payments,” banks have contemplated central bank digital currency issuance in depth, to stay competitive in the digital age. According to Arner, COVID-19 has been beneficial for digital currencies, as it has accelerated the timeline of CBDC projects.

In addressing why central banks have felt the need to consider central bank digital currency issuance, Arner said that it was to remain competitive in the financial world, to offer monetary stability. He also added that central banks were “responding to the evolution of new technologies to see how they can deliver better roles in a better way.”

Arner also elaborated further, saying that with the advent of Libra, Facebook’s version of a global private stablecoin, the next stage of development for CBDCs was also triggered, as banks viewed it as a potential threat in remaining financially competitive. Facebook first announced its intentions in launching a “global coin” dubbed Libra in mid-2019.

The combination of Facebook’s venture into digital assets as well as the rise of digital innovation during COVID-19 has accelerated the pilot phases of central banks’ digital currency projects, with major economic powerhouses such as China launching a test pilot for its own version of CBDC – the digital currency electronic payment (DCEP) – and the US’ proposal for a digital dollar. As CBDC has been considered by central banks all over the world, it has turned into a race in who will be the first to implement a central bank digital currency.

Other major financial centers such as Singapore and Hong Kong have also looked at how they could be “the nodes” in implementing CBDC.

While the world’s economic giants have struggled to launch a full-fledged central bank digital currency, it appears that the Bahamas has surpassed all expectations and launched the Sand Dollar, becoming the first in the world to launch a state-backed virtual currency.

Digital Currencies Impede US Treasury Sanction Efforts, Report says

A new report issued by the United States Treasury Department revealed that digital currencies are posing a critical impediment to its sanctions policies, a trend it is determined to put an end to.

Cryptocurrencies as a Tool to Bypass U.S. Sanctions

Per the 9-page report, the Treasury Department highlighted digital currencies as one of the primary technological innovations that make its sanctions efforts ineffective.

“Technological innovations such as digital currencies, alternative payment platforms, and new ways of hiding cross-border transactions all potentially reduce the efficacy of American sanctions. These technologies offer malign actors opportunities to hold and transfer funds outside the traditional dollar-based financial system,”

The report also reads, adding that these cryptocurrencies “also empower our adversaries seeking to build new financial and payments systems intended to diminish the dollar’s global role. We are mindful of the risk that, if left unchecked, these digital assets and payments systems could harm the efficacy of our sanctions.”

The U.S. Dollar, as the reserve currency, is considered as part of global integration. The United States has long utilized financial sanctions to weaken state actors and non-state actors, such as political entities, that seem to threaten the country’s national security. Amongst the countries under related sanctions is Afghanistan, in which the U.S. froze billions of dollars since the Taliban took over the country’s regime.

Many sanctioned countries, including North Korea and Venezuela, are already exploring alternatives through digital currencies, a move that has proven to be of grave concern to the U.S. Treasury Department.

Cryptocurrencies: Tool for Financial Freedom

One of the primary goals of digital currencies like Bitcoin (BTC), Ethereum (ETH), and Tether (USDT) is to serve as a tool for financial freedom for everyone. Cryptocurrency transactions occur in a peer-2-peer manner and cannot be blocked by any financial regulator as they appear on the blockchain, which is not under the control of one entity.

While the U.S. perceives digital currencies as a flawed tool that it hopes to learn more from to mete out its sanctions, adopters of the technologies consider crypto as one of the most innovative discoveries in the 21st Century, with all thanks to Satoshi Nakamoto.

BIS Survey: 93% of Central Banks Engaged in CBDCs, 15 Retail and 9 Wholesale CBDCs Expected by 2030

The Bank for International Settlements (BIS) has released a survey revealing that 93% of central banks are now engaged in some form of Central Bank Digital Currency (CBDC) work, with retail CBDCs taking the lead over wholesale CBDCs.

The survey, which gathered responses from 86 central banks, shows that over half of these institutions are not just exploring CBDCs but are conducting concrete experiments or working on pilots. The progress in retail CBDCs is more advanced, with almost a quarter of central banks piloting a retail CBDC.

The BIS survey also highlights the perceived value of CBDCs. More than 80% of central banks see potential benefits in having both a retail CBDC and a fast payment system (FPS). The unique properties and additional features that a retail CBDC can offer are seen as key advantages.

The emergence of cryptoassets and stablecoins has been a significant influence, accelerating CBDC work for nearly 60% of the respondent central banks. However, the survey also notes that stablecoins and other cryptoassets are rarely used for payments outside the crypto ecosystem.

The survey suggests that by 2030, we could see 15 retail and nine wholesale CBDCs in public circulation. This projection reflects the growing interest in digital currencies by central banks worldwide.

In terms of motivation, central banks in emerging market and developing economies (EMDEs) are more likely to be driven by financial inclusion-related motivations in their CBDC work. On the other hand, the desire to enhance cross-border payments primarily drives the work on wholesale CBDCs.

Currently, four central banks have issued a live retail CBDC: The Bahamas, the Eastern Caribbean, Jamaica, and Nigeria. This development marks a significant milestone in the global adoption of CBDCs.

The BIS survey provides a comprehensive overview of the current state of CBDC development and offers valuable insights into the future trajectory of digital currencies. As the exploration and experimentation with CBDCs continue, their role in the global financial system is set to become increasingly significant.

FSB 2024 Agenda: Strengthening Crypto Regulation and Embracing AI"

The Financial Stability Board (FSB) has published its 2024 Work Programme, underlining a robust approach towards the regulation of crypto-assets and a keen focus on the financial implications of digital innovations like tokenization and artificial intelligence (AI).

The FSB, an international body responsible for overseeing the global financial system, has set out a comprehensive plan for 2024, pivoting on the need to streamline the implementation of its global regulatory framework for crypto-asset activities, an initiative that began taking shape in July 2023. This framework demands that crypto platforms segregate clients’ digital assets from the platforms’ own funds, ensuring a clear separation of interests and bolstering cross-border regulatory cooperation and oversight.

The FSB’s 2024 roadmap encapsulates a dual focus. First, it prioritizes the complete implementation of the Key Attributes of Effective Resolution Regimes for Financial Institutions across all sectors, a response to the lessons learned from the banking turmoil in March 2023. Secondly, it aims to harness the benefits of digital innovation, such as AI and tokenization, while diligently containing their associated risks.

Another critical area of the FSB’s work is the enhancement of cross-border payments. In partnership with the Committee on Payments and Market Infrastructure (CPMI), the FSB is dedicated to developing a cohesive set of actions and a framework to achieve substantial progress by 2027. This includes issuing recommendations to promote alignment and interoperability in data frameworks related to cross-border payments and strengthening the regulation and supervision of banks and non-banks providing these services.

In the realm of crypto regulation, the FSB plans to issue progress reports throughout the year, focusing on the interoperability of models that facilitate cross-border payments and extending these principles to global regulations for banks and non-banks exploring the crypto sector. The FSB’s approach underscores the importance of innovation in the crypto markets, tokenization, AI, and the development of a global stablecoin.

As for tokenization, the FSB aims to finalize its work on the financial stability implications of tokenizing real-world assets, a trend gaining momentum as major banks increasingly deploy blockchain technology. The FSB will prepare a report for the G20 on recent developments in AI and their potential implications for financial stability. This report is slated for November 2024, while the one on tokenization is expected in October.

A key aspect of the FSB’s program is enhancing cyber resilience. In April 2023, the FSB proposed a standard format called FIRE (Format for Incident Reporting Exchange) for financial institutions to report incidents, facilitating information exchange among authorities. This initiative aims to promote greater convergence in financial institutions’ reporting of incidents to monetary authorities, thus improving consistency in cyber incident reporting.

This comprehensive approach by the FSB not only fortifies the global financial infrastructure against emerging digital risks but also ensures a harmonized progression into the era of digital finance, balancing innovation with stability.

Wealth Management's Future: Embracing Innovation for the Next Investment Era

In the face of a rapidly changing financial landscape, wealth management firms are poised to undergo a significant transformation. A recent study, spearheaded by a research coalition consisting of ThoughtLab, Deloitte, and FNZ, with contributions from Amazon Web Services (AWS) and Genesys, reveals that by 2028, the investment industry will witness a drastic shift, with digital innovation and artificial intelligence (AI) becoming critical components of prosperity.

The comprehensive analysis, which incorporated insights from 250 wealth management firms and feedback from 2,000 investors globally, indicates that 55% of executives anticipate born-digital firms will significantly transform the wealth industry. Moreover, 52% of wealth management firms at the forefront of digital transformation foresee a dramatic industry reconfiguration.

A remarkable 69% of executives are convinced that AI will alter their firms’ operations substantially. Simultaneously, 47% predict that blockchain and related technologies will minimize the need for intermediaries like custodians and clearinghouses, underscoring the increasing relevance of decentralization in financial services.

Executives also forecast a trend toward commoditization of most products, compelling providers to offer value-added services to justify fees. Additionally, 39% anticipate the lines between wealth management, banking, and insurance will blur as investors demand more integrated financial solutions.

The study underscores the urgent need for digital and process transformation as Generation X ascends in influence, and Generations Y and Z, along with wealth in emerging markets, begin to shape investment landscapes. An overwhelming majority of investors, particularly younger generations, expect digital experiences from investment providers that match those of leading born-digital companies.

In response to these evolving dynamics, investment providers are elevating technology to a core competency, with a vast majority advancing towards or already implementing modernized, cloud-based platforms. These platforms enable wealth management firms to digitize operations, reduce costs, devise new business models, and tap into novel revenue streams.

The “Building a Future-Ready Investment Firm” study conducted during October-November 2023 provides both quantitative data and qualitative insights, including views from an advisory panel of industry experts and in-depth interviews with senior practitioners from 11 wealth management firms.

Louis Celi, CEO of ThoughtLab and director of the study, emphasizes the importance of understanding future investor expectations and behaviors to ensure client satisfaction. He stresses that wealth management firms must reconsider their offerings, workflows, business models, and digital strategies to become future-ready.

Five key actions have emerged from the research for wealth management firms aiming to prepare for the next investment era:

Digitize client advice and experience.

Capitalize on client diversity for business growth.

Harness AI and digital innovation for performance enhancement.

Innovate offerings to meet future investing demands.

Adapt business models and market positioning to a new competitive landscape.

To delve deeper into the study’s findings and explore the evolving strategies for investment firms, the full report is available for download.

The insights from this study are critical for wealth management firms as they navigate the transition to a more digitally-driven, investor-centric future. With the right approach, these firms can not only survive but thrive in the next era of investing.