Digital Currencies: The Future of Banking

Javier Gutierrez |

Testing for China’s CBDC (Central-Bank Digital Currency), the digital yuan, began earlier this month, which means that we can safely expect to see the world’s first sovereign digital currency rolled out later this year. In this article, we analyse the impact of cashless payments in modern society and look at where the EU stands in the mobile-first banking revolution.

There has been an extreme uptake in mobile payments in China over the last couple of years, with more than 765 million cashless payment users in 2020 alone, spanning across platforms such as Google Pay, Apple Pay, WeChat Pay and AliPay. In a study by the South China Morning Post, mobile payments are already accounting for four out of every five transactions, placing China well on their way to becoming the first cashless economy. This move to ‘mobile first’ is thanks to the innovation of the FinTech sector, China’s Central Bank and big technology platforms supported by a nation who easily adopts digital. There is no doubt that paradigm shifts related to the coronavirus in the way humans earn and pay, has also accelerated the further rise of FinTechs and mobile payments.

With China’s four largest commercial banks beginning internal testing this month for its CBDC (Central-Bank Digital Currency), the digital yuan, we can safely expect to see the world’s first sovereign digital currency rolled out later this year. If this financial endeavor proves to be successful, it could forever change the way in which central banks manage liquidity and physical money. How will it work? Customers will be able to download a government-issued digital wallet equivalent to an account at China’s Central Bank with the same validity as cash.

E-wallets have been around for a long time now and for many, have become a go-to method of payment. The needs and requirements of consumers in terms of making payments have changed drastically over the last few years and digital payments have become more and more frequent. When we talk about the E-wallet adoption rate, China, Norway, the United Kingdom and Japan are in the lead. Just last year, over €14 000 billion in cashless transactions were reported across the world with tech platforms like WeChat Pay, AliPay, PayPal and Apple Pay leading the pack.

Where does the EU rest in the mobile-first banking revolution? Although still far from a digital currency, the European Union has expressed their intention to create a unique digital market which will considerably reduce the regulatory cost of FinTechs across Europe, as well as allow them to benefit from standard licences and a common sandbox. The landscape is juxtaposed by traditional banking systems and innovative challenger banks and FinTechs who are slowly obtaining more market share. The Revised Payment Services Directive (PSD2), which came into effect in January 2018, aims to create a more integrated European payments market, making them safer and more secure as well as protecting consumers. This regulation enforces banks to open their APIs allowing non bank agents to access clients’ bank accounts, with their authorisation, to execute transactions and manage financial data. Furthermore, under the General Data Protection Regulation (GDPR) controllers and processors of personal data must put in place appropriate technical and organisational measures to implement data protection principles. It’s primary aim is to give individuals control over their personal data and to simplify the regulatory environment for international business by unifying the regulation within the EU.

As China opens its financial system to foreign players and the world witnesses the roll out of the first digital currency, it will be interesting to see how quickly other countries follow. Time will tell the true impact it will have on the likes of operational efficiency, risk management processes, and related regulations. We will also gain further clarity into what risks digital currencies impose and what impact could they have in the banking industry. 

Regulatory bodies will need to recognise their role in driving the deployment, adoption of these new technologies and protection of their users, in the ever more accessible financial ecosystem.

To learn more about Alyne’s GDPR, PSD2, EBA guidelines and extensive risk management capabilities, contact our team.