By Stephanie Lai, President of King’s Commercial Awareness Society
Digital currencies are increasingly being prepared for in financial services, as they will revolutionise legacy structures and relations.
Digital currencies are typically considered as popularised cryptocurrencies such as Bitcoin or Ether. However, their technology is being increasingly considered in relation to financial services from the release of Central Bank Digital Coins (CBDCs) and Onyx by JP Morgan, which are more reliable and have the ability to restructure the financial world. The substantial impacts of these digital assets are particularly as they will allow for the proper uptake of blockchain technology, as well as a democratisation of financial opportunities.
Digital currencies have growing importance as they are being trialled or slowly implemented by central banks in most countries as central bank digital coins (CBDCs), allowing financial institutions to begin preparing for their eventual uptake tangibly. CBDCs are a digital fiat currency released by domestic central banks and can reshape financial transactions by allowing for real-time payments between corporations. This is as CBDCs operate on the blockchain, allowing for increasingly faster, more secure, real-time transactions. The impact of real-time payments from secure digital currencies is the opportunity for better cash management as payments will be instantly cleared, which is a factor that can largely impact the viability of companies. This can democratize financial opportunities for small and medium-sized companies that work on a smaller scale due to out-goings, such as paying employee wages, causing smaller margins for liquidity, as they must be paid in a timely manner to minimise reputational issues. This potential advantage will increase small and medium sized companies’ market competitiveness against larger firms.
The rise of preparation for digital currencies is also being propelled by the release of the stablecoin, Onyx, by JP Morgan in 2019, which has executed large trades in Europe for the likes of Siemens. Creating a commercial digital coin suggests a new scope of competition, especially as Onyx has already traded over USD 300bn. The creation of such digital assets will heighten the loyalty of these big corporations to certain banks, as these transactions will be able to be executed faster and likely for a lower cost if they are all executed through a single commercial digital currency.
Future impacts:
The proper uptake of digital currencies issued by central banks or institutional banks into financial services will be the main catalyst in the uptake of blockchain infrastructure, which is required to hold these digital assets. In turn, there could be a domino effect of a deepened use of other digital assets, such as digital bonds operating on the blockchain. However, this infrastructure is yet to be implemented to a vast extent, given the continual high costs associated with regular software updates. Further, the uptake of digital coins is inhibited due to the carbon emissions associated with creating and storing these financial assets, especially if they are formed using ‘proof of work.’ This is as regulation enforces a Net 0 transition by 2050.
All in all, digital currencies are becoming increasingly popular as they are being formed by reputable sources, which will democratise financial opportunities and catalyse the uptake of other blockchain-reliant assets, which will fundamentally revolutionise the infrastructure in financial services.
