Digital Currencies: The money of tomorrow or today?
Last week the Treasury-commissioned fintech Review published its agenda for the future of the UK intech sector. It recommended more government oversight, closer regulatory alignment, and perhaps most intriguingly, an embrace of digital currencies.
But what would this actually look like in the UK – and why does it matter?
To understand this, it helps to zoom out on how the economy has changed in the past year. The pandemic pushed a record amount of business online. We’ve made significant progress towards a truly digitally-connected society.
With consumers rapidly moving away from cash payments over the past 12 months digital payments in the UK have leapfrogged. Our research shows that digital wallets now account for 32% of all online payments and by 2024 will make up 40% of online transactions.
While today most digital payment methods connect back to a traditional credit or debit card, that’s changing. The last 12 months has also seen renewed attention on cryptocurrencies such as Bitcoin, which rose to a record high of more than $50,000 last month.
COVID-19 Accelerates the Use of Digital Currencies
The uncertainty created by the ongoing pandemic has led to cryptocurrencies, including former dark-web darling, Bitcoin taking a more mainstream position in everyday commerce. Property companies in London now let their tenants pay their rent with Bitcoin. You can also use it to buy a seat on Virgin Galactic’s commercial space flights.
Over the past year we have seen tech players from Apple to PayPal adding support for cryptocurrency to their offerings. As consumer interest in digital currencies increases, we’re even seeing some pubs, restaurants and takeaways beginning to accept these newer forms of payment.
Digital Currencies are the future
As cryptocurrencies nudge towards the mainstream, the world’s biggest central banks are under pressure to fend off private sector threats to traditional currencies. This has spurred on plans from central banks around the world to issue their own digital cash in the form of central bank digital currencies (CBDC).
In the coming years these digital currencies will play a key role in the financial services ecosystem and they could eventually bring about the demise of cash all together. The review highlights the promise (and potential peril) in this transition.
The Bank of England has the opportunity to take a global lead in providing a digital currency which offers stability and reliability.
A centrally-backed digital currency provides better security, while reducing fraud and lowering costs to both businesses and consumers. It allows for better oversight, making crimes such as tax evasion much more difficult and offers a higher level of control and traceability, with better tracking for tax collection.
There are also social motivations. These currencies could make the transfer of money across borders easier and this will have many positive implications that could broaden financial inclusion, allowing access to cash and funds to more people.
Combing digital currencies with smart contract technology could help businesses with cash flow challenges by making supply chains more efficient, especially in the uncertainty-ravaged retail and hospitality sector. We also may see the rise of programmable money, which could allow key workers discounted VAT rates, among many other features.
Digital currencies will be a game-changer, transforming the banking and payments ecosystem on a scale never been seen before, and with more and more countries now beginning to implement their own CBDCs, 2021 could be the year when CBDCs have the chance of becoming a reality.