By Pragati Verma, Contributing Editor, Straight Talk
Digital money is getting closer to reality. Countries around the world seem to be rushing to experiment with a digital version of their currency. More than four-fifths (86 percent) of the world’s central banks are researching potential for digital currencies, 60 percent are experimenting with related technologies, and 14 percent are running pilot projects, according to a survey by the Switzerland-based Bank for International Settlements. China has already created its own government-issued digital currency and the Bank of Mexico plans to put its own digital currency in circulation by 2024. The US Federal Reserve is also studying a possible Central Bank digital currency.
Time to Rethink Money
If global central banks are experimenting with digital offerings, will large organizations follow suit? No, they will turn to central bank digital currencies, according to a new Gartner report. It expects one in five large organizations to use digital currencies for payments, stored value, or collateral by 2024. “Increasing mainstream acceptance of cryptocurrencies on traditional payment platforms and the rise of central bank digital currencies (CBDCs) will push many large enterprises to incorporate digital currencies into their applications in the coming years,” says Avivah Litan, distinguished vice president analyst in the Gartner IT practice, “Digital currencies will be primarily used by these organizations for payment, a store of value and the ability to leverage high-yield investments available in decentralized finance applications.”
Gartner experts believe that digital currencies’ growth will be driven by the “already healthy environment of service providers and off-the-shelf solutions” available to large enterprises that have identified a specific use case for digital currencies. “Among the primary use cases for digital currencies that we have identified, there will be no need for most organizations to develop a customized blockchain application stack. Many large banks, payment platforms, institutional digital asset custodians and wallet providers have already done the heavy lifting in this area, which should provide large enterprises with a minimum of friction in deploying their own digital currency applications.” elaborates Litan.
Digital currency applications will become more palatable to CFOs in the next 12 to 24 months, says Alexander Bant, chief of research in the Gartner Finance practice in the report Predicts 2022: Prepare for Blockchain-Based Digital Disruption. He explains his reasons :”There has always been theoretical appeal in the use of blockchain and digital currencies for CFOs as a means to lower costs, increase transaction processing speed, reach new global customers, move toward continuous accounting and auditing, and create an error-free and fraud-free environment. Now, with Congressional oversight starting to develop and the potential for more central banks to join China in launching a CBDC, we can see a path where the use of digital currencies will be potentially more predictable and stable in the future.”
Other reasons to embrace the new form of currency, according to him, include hedging against the highest inflation in more than 39 years, increased regulatory clarity, improvements in energy usage, and adoption by employees, consumers, and suppliers.
Gartner is not alone in predicting a major acceleration to digital currencies. IDC Research Director, Worldwide Blockchain Strategies’ James Wester advises financial institutions to treat cryptocurrencies as an opportunity. In a blogpost, he writes, “From the perspective of financial services providers, it is well past time for banks to begin looking at the opportunities presented by cryptocurrencies and being building their product and technology strategies to include them.” He goes on to explain his reasons: “Several dozen countries around the world are already in some phase of designing central bank digital currencies, the digital fiat version of non-fiat digital currencies. Stablecoins and distributed ledgers are being built into products to make online commerce or cross-border payments faster, more efficient, and lower cost. Cryptocurrencies are just the beginning of a bigger transformation, one that financial institutions need to understand.”
It won’t happen overnight
Financial services companies might be the first but won’t be alone for long. Forrester delves into implications for non-financial firms. Principal analyst Sam Higgins, analyst Meng Lui, and senior analyst Zhi Ying Barry predict an unstoppable rise for digital currencies, but recommend non-financial services organization to proceed with caution.
In a blogpost, they write, “For non-financial services organizations, it’s crucial to understand the maturity and impact of Central Bank digital currencies on your industry. Set the right expectations for its different phases and adjust your business plans accordingly. Although firms will start on their digital currency journey sooner or later, no two companies will have the same starting point. Ultimately, your firm will use the digital currency to better serve your customers, so knowing how to embed CBDC into your products and services to provide excellent customer experience (CX) is the key to maximizing its value. Banks can differentiate themselves from others in digital experience by seamlessly embedding digital currency-based retail payment services into their banking apps.”
Warning that mass adoption will take time, they caution organizations to be aware of potential challenges. “Companies must understand that changing customer behavior is not easy; it requires continued investment in CX improvement and collaboration with all ecosystem participants across banks, fintechs, technology providers, businesses, consumers, and central banks. Central Bank digital currency is designed in the interest of the public, and central banks will likely request banks or other participating financial services companies to not charge merchants any payment commission fees. Financial services companies need to change their mindset to build new business models based on data or technology usage, subscriptions, or shared services rather than commission fees. Don’t expect to earn profit from these new business models until later phases of the digital currency; focus on designing customer-centric use cases and accumulating digital currency users in the current phase,” they say.
Weigh pros and cons
It might be early days yet, but analysts already see a path where the use of digital currencies will be potentially more predictable and stable in the future.
Gartner’s Bant advises CFOs to start getting their heads around digital assets, currencies, and other blockchain applications. “When the CEO and Board start asking for the opinion of the CFO, they must have a point of view on the risks and points of differentiation for their organization,” he said. “We are starting to see some Fortune 500 companies map out scenarios for how they will respond if a country or supplier moved to doing business with only digital currency and what steps they would take as a result.”
Pragati Verma is a writer and editor exploring new and emerging technologies. She has managed technology sections at India’s The Economic Times and The Financial Express.