After decades of working in technology, I thought I knew about the latest tech trends, so it was surprising in 2015 or 2016 to get some advice from a taxi driver that I was missing out on investing in Bitcoin.
He was driving a mid-range people carrier, which was not made out of precious metals, so I nodded and agreed and ignored him. I wonder where he is now and where I might be if I’d listened and taken his advice. A single Bitcoin cost about $250 in 2015. Today that coin is worth over $60,000. There are countless stories of lucky souls making a fortune.
If we fast forward to 2021, investors and analysts still have a huge rainbow of opinions about the value and future of cryptocurrencies. However, given my previous failure to recognise gold dust, I should likely refrain from making any forecasts.
However, I do feel more confident making some predictions about the new cousins of cryptocurrencies- Central Bank Digital Currencies or CBDCs.
Central banks around the world are looking at whether parts of the blockchain technology can be used to develop versions of their primary currencies which are specialised for online use.
1. Digital currencies are not new to consumers
When we see images of CBDCs being trialled, we see things like selected Chinese consumers using their mobile phones to spend virtual Yuan in participating shops. Well, I do that too. If I buy groceries with a card loaded on my mobile phone, the experience is essentially identical. If I pay online with Paypal or Amazon, I get the same experience.
It is essential to remember that however exciting or scary digital currencies are to bankers and economists, most consumers care about only two things – security and convenience. They don’t want to lose their money and they don’t want to expend a single wasted millisecond on making a payment.
One of the problems with Cybercurrencies is that some are essentially designed with a memory leak. As more transactions happen, the ledger recording activity becomes enormous and despite modern computing power, that makes them slow to use. That might be fine if you’re buying a car, but it isn’t if you’re buying a bus ticket.
CBDCs will need to be easy and convenient and provide the same protections as card payments and bank transfers if they are to succeed.
2. The countries that go first may regret it
It seems likely that countries such as the USA will take a wait-and-see approach. For any talk of the US fearing it will miss out on first-moved advantage, the reality is that the first movers will have to do some very heavy and expensive lifting. And there’s a good chance of failure. Remember
Mondex? Probably not. It was a digital cash payment scheme in the 1990s that failed. Even Contactless, which is omnipresent today,had a tough path. I worked at RBS when they conducted the first public
contactless payment in 2007 with a bizarre formula one stunt , but it was several years before McDonalds rolled out contactless to its restaurants. For a good deal of that time, the busiest UK contactless site was the RBS canteen.
Change is expensive and unpredictable, and if we follow the contactless example a patient approach pays real dividends.
3. Privacy 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 Technology (DLT) 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 forge-proof – both online and offline – though many will try. But do I want my central bank to know that I just spent £3.40 on a latte? Is the coffee shop comfortable the £3.40 can be tracked to their bank account and onwards, and a 3rd party can see the tax payments that they chose to make from their account.
I suspect that a lot of consumers and retailers will conclude the current system is working pretty well and they’re happy to go on buying coffees with their cards and phones.The role of banks becomes interesting –
When we see demos of CDBCs the payment seems to come direct from the wallet to the retailer. My immediate reaction is “where’s the bank?” When we use paper currency, we are to some degree circumventing the banking system and a very tidy amount of tax free and unsavoury transactions happen that way for a reason.
Banks are often viewed negatively, but they are largely responsible for monitoring the way that money is spent and have a host of responsibilities to prevent fraud and financial crime. Central banks must ensure CDBCs are valid and accepted and that almost certainly means carefully balancing banks’ fears and ambitions.
By the way, beware talk of CBDCs solving the problem of the unbanked. There is a great number of unbanked or underbanked consumers globally. For example,
66M Americans, 1 in 5, are said to be unbanked or underbanked. Even if the true number was a fifth of that estimate, it is still remarkable.
CBDCs won’t solve the problem. People who don’t trust banks and governments and have no money, will not be the first in line for a new technology from banks and the government.
5. Fraud and financial crime
For all of the potential of blockchain technology to shut down fraudsters, we must remember the experiences of the last few years – particularly during Covid 19. Customers are not getting defrauded by direct attacks into their bank accounts or credit cards. Instead, fraudsters are using social engineering and technological naivety to trick people into divulging their private details and fraudsters are essentially using the victims’ house keys to open the front door.
These scams don’t just impact those on the edges. There are several examples of fraud personnel from banks being compromised. There are better security solutions, but people find them simply too difficult, confusing and inconvenient to use.
The weak link with CBDCs will almost certainly not be the security – it will be the human.
When it comes to using CBDCs for money laundering and terrorist financing, things are going to get very complicated – particularly for early adopters.
Fraudsters today which banks are least likely to disrupt mule networks to stop proceeds of crime flowing through the network. With CDBCs, criminals will have the opportunity to cherry pick the virtual currency which suits their needs. In the same way that banks today are wary of some correspondent countries and banks, there may be concerns about whole currencies with the geo-political risk which that entails.
Whether it’s trade finance (and therefore TFML concerns) or retail banking, banks and governments will carefully have to balance individual security & convenience with broader security and stability concerns to make CBDCs a success.
No taxi drivers have been consulted in the writing of these forecasts, so they may be way off!
If you would like to discuss these topics and how to protect your organisation against a broad range of criminal and financial risks, please let me know.