Why have banks started taking digital currencies seriously?
The original cryptocurrency, Bitcoin, was launched in 2009 in the wake of a global recession–but it wasn’t just a reaction to the financial crisis. It was the culmination of decades of attempts by cryptographers to create digital money that couldn’t be duplicated.
The Bitcoin blockchain was the first practical solution: a cryptographically-secured ledger that anonymously records transactions on every member’s computer, so that all participants can access the same data. The ledger belongs to everyone and no one. This distributed ledger technology (DLT) is far more significant to banking than Bitcoin or any other specific cryptocurrency.
Banks are already investing in DLT as a new platform for payment processing, international cash transactions, loans and investment in cryptocurrencies. Some have even introduced their own cryptocurrencies, like JPMorgan Chase’s JPM Coin. And with investment in crypto gathering speed, banks also need to make it easy for their customers to buy, sell and hold cryptocurrencies. Those who fail to adapt will be left behind.
Central Bank Digital Currencies
In the next few years, we can expect to see every major economy developing its own central bank digital currency (CBDC)–a virtual version of the country’s currency. Europe has already created a framework to regulate digital euros, Canada is piloting digital dollars, the US and UK are researching digital dollars and pounds, and the Bahamas have already launched their Bahamas Sand Dollar digital currency.
CBDCs could revolutionise bank payments and transfers, in terms of speed, cost, and efficiency. Every bank needs to make investing in DLT a strategic priority.
An Architecture for Digital Money
Banks should also be excited about the new blockchain protocol that includes extra logic to support regulatory compliance, including Anti Money Laundering (AML), Know Your Customer (KYC), and data protection and privacy rules. Regulated digital cash is expected to be about 40% cheaper than crypto, and simpler too. It will make digital transactions much faster and smoother for business and personal customers.
With many banks going through digital transformations, it’s vital to ensure that new platforms have the right architecture to accommodate the rapid evolution of cryptocurrencies and CBDCs.