• Wed. Nov 16th, 2022

Cryptocurrencies, central banks, cafes and taxi drivers


After decades of working in tech, I thought I knew about the latest tech trends, so it was surprising in 2015 or 2016 to get advice from a taxi driver that I missed investing in Bitcoin.

He was driving a midrange minivan, which wasn’t made of precious metals, so I nodded, accepted, and ignored him. I wonder where he is now and where I would be if I had listened and followed his advice. A single Bitcoin cost around $ 250 in 2015. Today, that coin is worth over $ 60,000. There are countless stories of lucky souls making their fortune.

If we move quickly to 2021, investors and analysts still have a huge rainbow of opinions on the value and future of cryptocurrencies. However, given my previous failure to recognize gold dust, I should probably refrain from making predictions.

However, I feel more confident in making predictions about the new cousins ​​of cryptocurrencies – Central Bank Digital Currencies or CBDC.

Central banks around the world are investigating whether parts of blockchain technology can be used to develop versions of their major currencies that are specialized for online use.

1. Digital currencies are nothing new to consumers

When we see images of tested CBDCs, we see things like selected Chinese consumers using their cell phones to spend virtual yuan at participating stores. Well, I do too. If I buy groceries with a card loaded on my cell phone, the experience is essentially the same. If I pay online with Paypal or Amazon, I get the same experience.

It’s essential to remember that no matter how exciting or scary digital currencies are to bankers and economists, most consumers only care about two things: security and convenience. They don’t want to waste their money and they don’t want to spend a single wasted millisecond to make a payment.

One of the problems with currencies is that some are basically designed with a memory leak. As more and more transactions occur, the ledger recording activity becomes huge and despite modern computing power, this makes them slow to use. It might be good if you are buying a car, but it is not if you are buying a bus ticket.

CBDCs will need to be simple and convenient and offer the same protections as card payments and bank transfers to be successful.

Digital Yuan

2. The countries which pass first may regret it

It seems likely that countries like the United States will take a wait-and-see approach. For any discussion of the United States fearing it might miss out on the first-mover advantage, the reality is that early players will have to put in very heavy and costly efforts. And there is a good chance of failure. Do you remember Mondex? Probably not. It was a failed digital cash payment system in the 1990s. Even the contactless, ubiquitous today, has had a difficult journey. I worked at RBS when they made the first public contactless payment in 2007 with a bizarre Formula 1 stunt, but it was several years before McDonalds rolled out contactless in their restaurants. For much of that time, the UK’s busiest contactless site was the RBS Canteen.

Change is costly and unpredictable, and if we follow the lead of contactless, a patient approach pays dividends.

3. Confidentiality will be key – in some countries at least

Cryptocurrencies have been hailed differently as 100% anonymous – hence their use in blackmail – and 100% traceable due to the distributed ledger (DLT) technology they use.

Different technologies have different attributes and it will be fascinating to see how different governments choose to implement their digital currencies. Done well, it is possible to foresee that a currency could be forgery-proof – both online and offline – although many will try. But do I want my central bank to know that I just spent £ 3.40 on a latte? Is the coffee comfortable, the £ 3.40 can be tracked in their bank account and beyond, and a third party can see the tax payments they have chosen to make from their account.

I suspect a lot of consumers and retailers will find that the current system works quite well and that they are happy to continue shopping for coffee with their cards and phones. The role of banks becomes interesting –

When we see demonstrations of CDBC, the payment appears to come directly from the wallet to the retailer. My immediate reaction is “where is the bank?” When we use paper money, we are bypassing the banking system to some extent, and a very limited number of tax-free and unsavory transactions happen that way for a reason.

Banks are often viewed negatively, but much of their responsibility is to monitor how money is spent and have many responsibilities to prevent fraud and financial crime. Central banks need to ensure that CDBCs are valid and accepted, which almost certainly involves carefully balancing banks’ fears and ambitions.

By the way, beware of CBDCs that solve the unbanked problem. There are a large number of unbanked or underbanked consumers in the world. For example, 66 million Americans, 1 in 5, would be unbanked or underbanked. Even though the true number was one-fifth of that estimate, it’s still remarkable.

CBDCs will not solve the problem. People who do not trust banks and governments, and have no money, will not be the first to receive new technology from banks and government.

5. Fraud and financial crime

For the full potential of blockchain technology to stop fraudsters, we must remember the experiences of the past few years – especially during Covid 19. Customers are not defrauded by direct attacks on their bank accounts or credit cards. Instead, scammers use social engineering and technological naivety to trick people into divulging their private information, and scammers are essentially using victims’ house keys to open the front door.

These scams don’t just impact the edges. There are several examples of compromised bank staff fraud. There are better security solutions out there, but people just find them too difficult, confusing, and inconvenient to use.

The weak link with the CBDCs will almost certainly not be security – it will be people.

When it comes to using CBDCs for money laundering and terrorist financing, things are going to get very complicated, especially for first-time users.

Today’s fraudsters whose banks are the least likely to disrupt mule networks to prevent the proceeds of crime from flowing through the network. With CDBC, criminals will be able to choose the virtual currency that suits their needs. Just as banks are suspicious of certain countries and correspondent banks today, there can be concerns about entire currencies with the geopolitical risk that this entails.

Whether it’s trade finance (and therefore TFML issues) or retail banking, banks and governments will need to carefully balance individual security and convenience with broader security and stability concerns to do so. of CBDCs a success.

No taxi driver was consulted in writing this forecast, so they might be a long way off!

If you would like to discuss these topics and how to protect your organization from a wide range of criminal and financial risks, let me know.


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