Universal Digital Currencies: The Future of Money
In various global initiatives, experiments with cryptocurrencies and Central Bank Digital Currencies (CBDCs) are progressing towards a potential widespread adoption of universal digital currencies by the 2030s. However, it remains uncertain whether this will enhance existing cryptocurrencies like Bitcoin or give rise to an entirely new type of blockchain-based currency.
Jorge Lesmes, Senior Director and Client Partner in Banking at NTT DATA, sheds light on the current priorities in digital currency development: “Lately, much of the innovation around digital currencies has been concentrated on regulatory compliance, enhancing security, and boosting stability.”
“However, we are also seeing a push towards innovations that integrate CBDCs and cryptocurrencies into existing financial systems,” he adds.
The implications for businesses could be immense. Universal digital currencies could facilitate direct peer-to-peer transactions, cutting out intermediaries, which would lower transaction fees and enhance operational efficiency.
Furthermore, they might open the door to ‘programmable money’ powered by smart contracts that automatically execute transactions based on predetermined conditions.
According to EY’s 2019 Global FinTech Adoption Index, two-thirds of consumers are already utilizing two or more fintech services. As universal digital currencies gain traction, this adoption is likely to rise, offering businesses new avenues for innovation in payment systems and financial services.
Jorge emphasizes the necessity of translating plans into actionable steps: “To advance, transforming existing digital currency strategies into concrete actions is vital.”
“Understanding how digital currencies affect individual banking users, as well as traditional banking processes, regulations, and financial literacy, is crucial. But it’s equally important that these considerations lead to tangible initiatives.”
The global ecosystem for adopting digital currencies is varied, with several nations taking the lead. Jorge observes: “The U.S., with its robust financial infrastructure and role as a global technology and finance leader, is well-positioned to support the development and acceptance of digital currencies like Tether (USDT), MakerDAO (DAI), and USD Coin (USDC).”
“In contrast, China has introduced the First Digital USD (FDUSD), which is backed by the U.S. and recognized as one of the largest stablecoins globally.”
However, despite positive advancements, the journey toward widespread adoption faces several challenges. As Jorge notes, “Numerous issues need to be addressed for CBDCs and other digital currencies to become successful and earn public trust.”
“For instance, the lack of financial literacy, adequate education, and robust cybersecurity guidelines within the financial sector, coupled with the pressure on banks to innovate rapidly, are ongoing concerns that require attention.”
On the brighter side, the regulatory environment is evolving to keep up with these innovations.
In the next decade, the successful integration of digital currencies with existing financial systems, backed by regulatory frameworks that promote security and stability, will be crucial for their mainstream acceptance.
The Virtual Economy: Digital Assets and Virtual Worlds
The emergence of digital currencies could expand into a broader spectrum with the rise of virtual economies over the next decade.
By 2035, we may witness fully developed virtual economies featuring their own currencies, financial systems, and regulatory structures. This evolving trend is interlinked with the growth of the metaverse, which, despite fluctuations in interest, continues to draw substantial investment.
Rafaelle Lennox, Head of UCITS ETF Product Strategy at Franklin Templeton Investments, emphasizes the enormity of this sector: “It’s too significant to overlook. In the first half of 2022 alone, over $120 billion was invested in the metaverse, double what was seen in 2021, spanning from startups to established tech firms, venture capital, and private equity.”
This trend is already surfacing in the increasing popularity of virtual assets and currencies in online games and platforms. For example, the in-game currency Robux has become as desirable as pocket money for many children.
As advancements in virtual and augmented reality technologies continue, the distinction between physical and digital assets is likely to blur even further.
Mat Peck, CTO at Monavate, explains the natural synergy between cryptocurrencies and the metaverse: “As the metaverse expands, cryptocurrencies will definitely be the preferred payment method.”
“In a purely virtual setting where all goods are non-physical and ownership transfers occur instantaneously, every item available for purchase technically qualifies as a non-fungible token.”
Nevertheless, cryptocurrencies will face stiff competition from Central Bank Digital Currencies (CBDCs) as viable payment options in the metaverse. Elbruz Yilmaz, SVP of Vertical Growth at Paysafe, suggests, “CBDCs could play a more significant role as payment methods in the metaverse, complementing cryptocurrencies and stablecoins based on their unique advantages and market dynamics.”
Companies will likely need to adjust to functioning within virtual spaces, potentially creating new revenue opportunities through virtual goods and services. The virtual economy could also spur innovation in areas such as blockchain-based transaction systems and immersive collaborative user experiences.
Zack Michaelson, Senior Director of Financial Services at Publicis Sapient, highlights a critical concern: “Scams and theft are legitimate worries, especially given the current level of security practices that still need to mature.”
“Striking a balance between innovation and maintaining security will be a continuous challenge. Adding to that is the serious issue of data privacy. The metaverse generates vast user data, making ethical considerations and privacy a tightrope walk.”
Despite these significant obstacles, the potential for growth in the virtual economy remains promising.
Mat Peck from Monavate concludes: “The potential is vast and global, but perceptions of the metaverse need to change. For it to evolve as required, people must be able to exchange value appropriately—until that framework is established, its full utilization won’t materialize.”