Are digital assets the future of payments? 

Many of these assets promised to disrupt financial markets and large incumbents, and while they have received widespread attention, they haven’t quite achieved their potential.

Large institutions are taking notice. Around 90% of the world’s central banks are exploring digital currencies, according to the BIS.

They recognise that despite being in a golden age of innovation, payment systems remain somewhat archaic. And so, in my view, there is no reason why current payment systems won’t follow a similar trajectory to industries that have been transformed by new technology in the past decade.

After all, the world we live in is now digital, so it makes sense that money and assets should follow suit. But how realistic is this in the next five years? And will the technology and type of digital assets look the same?

Institutional interest in cryptocurrencies continues to grow. Goldman Sachs surveyed over 300 of its high-net-wealth clients, finding over 40% of them are already exposed to cryptocurrencies.

More recently, BBVA announced it will launch a bitcoin trading service for private banking clients in Switzerland, while Citigroup is considering providing trading, custody and financing services.

Aside from banks, payment firms such as Mastercard and PayPal are getting involved with cryptocurrencies by accepting payments via bitcoin.

And then there are CBDCs.

Infrastructure providers are trying to position themselves as ready for CBDCs. SWIFT recently published a report which outlined how it could work as a potential carrier of CBDCs should they become a reality.

Furthermore, central banks worldwide, working to safeguard public trust in money and payments, are exploring CBDCs. These retail and wholesale CBDCs can do this by offering the unique features of finality, liquidity, integrity and also provide security. For example, the most promising CBDC design would be tied to a digital identity, requiring users to identify themselves to access funds. This new venture fosters innovation which also serves public interest.

However, it is still early days in the development of cryptocurrencies, CBDCs and other forms of digital assets. There is a near-unanimous view that these assets need to become more standardised, secure and robust before entering the mainstream.

Over the coming years, digital assets are likely to face intense scrutiny from financial regulators and central banks before they are permitted as a form of secure payment.

This is to be expected. Anything that may affect the smooth functioning of the international monetary and financial system will rightly face hurdles by its gatekeepers and those responsible for its operations and security.

For example, the Basel Committee, the world’s most powerful banking standards-setter, has increased capital requirements for banks with exposure to volatile cryptocurrencies to reflect higher risks and financial stability concerns.

Under the proposals, banks would be required to hold capital equal to the exposure they face, therefore, a $100 exposure to bitcoin would require a minimum capital requirement of $100.

This could put regulated financial institutions off from getting involved or extending their existing cryptocurrency services. For example, while BBVA has launched trading services into Switzerland, they have held off from other markets as regulations are unclear and not standardised.

That said, not all digital assets would be treated as sternly as cryptocurrencies under these proposals. Stock tokens and stablecoins would fit into modified existing rules on the minimum capital standard for banks, potentially making them a more viable option.

Despite all the noise, for now, cryptocurrencies remain far too volatile and there are concerns around long-term supply, governance and consumer protection.

Stablecoins, on the other hand, offer a more secure, transparent and stable option and I am a firm believer in their potential, especially due to their swift settlement speeds. By including data into the coin, money becomes linked to what it pays. This offers a lot of automation possibilities, making it a strong contender.

Perhaps the most likely form of digital assets we will adopt, however, is CBDCs, controlled and issued by central banks. Significant testing has taken place already, and this type of digital asset would ensure strong supply, governance and regulation similar to what we see with fiat currencies today.

For any of these digital assets, buy-in amongst end-users – large corporation, SMEs and individual consumers – will be crucial to determining success. And success will ultimately be measured in decades, not years. If digital assets eventually become the norm, they are likely to be in a very different form from what exists today.

Laurent Descout is the CEO of Neo