There is an influx of digital currencies in the market today. Whether central banks and high-profile financial institutions choose to pay them attention however, is another thing. 

Meme coins such as DOGE and SHIBA serve what they intend to do, whilst cryptocurrencies such as Bitcoin and the proliferation of the stablecoin market have begun to disrupt the financial economy to such an extent that Central Bank Digital Currencies (CBDCs) have not just become an idea, they have become a realisation. 

So are digital currencies the natural next step in financial and payment evolution? Are they the future of money and currency, and can they co-exist with their fiat counterparts? This was heavily discussed during a recent London Blockchain Conference panel. 

Vincent Mele – Founder of digital financial management firm Otranto – believes that central banks have “woken up” to the idea of digital currencies and the impact they are currently having and the potential for greater growth in the future. 

Mele cited Meta – formerly known as Facebook – as the company that caused the biggest disruption in the financial market by attempting to lift its own native digital currency off the ground with Libra

Whilst Libra never truly materialsed, its presence served as a cautionary warning to central banks that multinational companies can issue their own digital currency and serve as their central bank, which would significantly alter a country’s economic stability.

This has since led to a vast majority of countries researching and piloting their own CBDC projects. Some are further ahead than others, such as China, India and Japan, but there has to be more contributing factors as to why, right? 

credit: Callum Williams

Simit Naik – Director of Strategy for nChain – spoke on the reasoning behind CBDCs and interest in other digital currencies to become a part of a country’s financial economy. 

He said: “Depending on your drivers and needs, you are going to choose a different option. CBDCs in a retail sense, may make a lot of countries look to deploy a digital form of central bank money. 

“In other countries, that desire and drive maybe isn’t as strong, but there may be a need to create a stablecoin-type payment solution that brings about more efficiency and lower the barrier of entry alongside the established payment schemes on top. 

“It is important to note that digital currencies and any other form of currency can co-exist, but it all comes down to what you are trying to achieve and where the value exists,” Naik remarked.

A fundamental and crucial element that policymakers are mulling over is whether they can control the influx of digital currencies circulating. 

The stablecoin boom

It’s no secret that the stablecoin market is experiencing an era of mass interest, but not from consumers, but large financial institutions. 

PayPal broke ground last year by becoming the first financial service of its kind to launch its own stablecoin; PYUSD. Cryptocurrency exchange Ripple Labs also announced this year that it intends to launch a native stablecoin to rival that of USDC and USDT, the markets two largest coins. 

“Global banks are very concerned about them (stablecoins) disrupting the global financial system”, said Blake O’Donnell – Partner of Punter Southhall Law

This was evident in the US after the release of PYUSD, where House Financial Service Committee member Maxine Waters shared ‘deep concern’ over private stablecoins’ potential impact on its system. 

Concerns are shared across many financial regulators, chiefly around the impact stablecoins can have on destabilising a country’s financial system. 

O’Donnell highlighted Russia using upwards of $10bn worth of USDT to buy weaponry to bypass financial laws set against it due to the war in Ukraine. 

Rapid regulation almost seems to be the logical answer before stablecoins and other digital currencies begin to break into the mainstream and be used as a viable form of payment, which O’Donnell noted is another fear amongst global regulators. 

But regulation is progressing in many countries quicker than one may think. The UK in particular, is one of the largest economies seeking to pass legislation of the regulation of stablecoins within the next year. 

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Many within the industry, however, have continually noted that a stablecoin framework needs to be separate from rules and guidelines set for traditional finance. 

Naik also highlighted that not all stablecoins act in the same manner as they offer different functions and services. 

He said: “We’ve got fiat-backed stablecoins, with USDC. We’ve got algorithmic stablecoins, asset-backed and crypto-backed stablecoins. The risk profile for each of these stablecoins changes, and none of them are without risk. 

“Even fiat-backed stablecoins still had a big de-pegging issue last year when Silicon Valley Bank went under and they had a massive challenge finding liquidity and capital controls. 

“So even if you did it under regulation, there is still an element of risk that exists. When you talk about stablecoins and digital currencies in general, risk is always going to exist, its just about the level of risk you are willing to take.”

Is interoperability between fiat and digital still the key question?

With regulation progressing, particularly within stablecoins, and CBDCs gathering more momentum, how will these digital currencies co-exist in the wider financial ecosystem? 

How willing will consumers be able to trust a new form of currency when the traditional status quo of the pound or the euro has been so ingrained? 

Kaj Burchardi – Managing Director for the Boston Consulting Group – summarised the interoperability question with the need to focus on how central banks and regulators intend to design and integrate digital currencies alongside fiat currencies. 

He said: “The multi-platform approach is important but also provides another risk. We need to be interoperable, and what we have seen between blockchains and other pieces, these interoperability questions are easily the weakest area. 

“You have to be massively careful of how you design (digital currencies) and how you implement it in order to still make it as good and secure as a common platform.”

“The more diversity we have, typically, the more innovation and speed we can have.”