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The (not too distant) Future of Money is Digital

Banking Services Portfolio Lead, Head of Industry and Innovation & Senior Digital Advisory Manager, ANZ

2022-04-12 00:00

Bitcoin, the first significant blockchain network and cryptocurrency, appears to be entering its teenage years much less of a rebel than it was in younger days. Synonymous with all forms of cryptocurrency, the digital coin and its ilk are now considered legitimate financial tools and investable assets, attracting both institutional and retail interest.

A variety of cryptocurrencies, including stablecoins, have emerged since Bitcoin became a household name. The rate of adoption and demand for these digital coins grew incrementally at first, before skyrocketing over the last 12 months. The market capitalisation of cryptocurrencies soared to an all-time high of $US3 trillion in November 2021, while the market value of stablecoins increased by more than twenty-fold between January 2020 and September 2021.

Major players from the world of traditional finance (TradFi), including Mastercard, Visa and PayPal, have added crypto to their offerings. While many countries have started to recognise the value of digital assets in some form or another, El Salvador became the first country to accept Bitcoin as legal tender in September 2021.

Comparison of Network Volumes

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Evolution of the digital asset infrastructure

Cryptocurrencies are more than just a new class of digital assets and their rapid rise has transformed how we think about the automation of value transfer. Traditional automated payment mechanisms – involving centralised clearing systems and multiple parties executing a transaction – now stand in sharp contrast to the crypto world, where transactions occur via a programmable digital asset that interacts with a smart contract.

Cryptocurrency networks are mostly permission-less, public and decentralised systems that anyone with a programmable token can use. These networks have inspired the creation of a new type of financial market infrastructure called ‘decentralised finance’ (DeFi). DeFi offers a glimpse into the future of TradFi and how conventional finance infrastructure is set to evolve.

DeFi works by reducing or eliminating intermediaries and replacing them with software. Through DeFi, services like borrowing, lending, exchanges and interest-earning accounts –which used to be exclusively offered by banks and other licensed regulated institutions – are created based on smart contracts, blockchain infrastructure and cryptocurrencies.

As the adoption of DeFi grows, there is no denying the crypto world – with its programmable money and digital assets – is here to stay, and will form an important part of our future economies and lives. This in turn has implications for everyone, including corporate treasurers.

Cryptocurrencies: Transforming a treasurer’s world

The global adoption of digital currencies is picking up pace. In the US, the first-ever bitcoin futures exchange-traded fund (ETF) began trading on the NYSE in October 2021, while the Monetary Authority of Singapore is reviewing hundreds of digital token licenses.

In Australia, digital assets contributed AUD2.1 billion to the country’s economy in 2021 and estimates suggest that as many as one in three Australians could have direct exposure to cryptocurrencies.

Global Cryptocurrency Adoption Rate

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As demand to hold and transact in cryptocurrency increases, companies are increasingly considering accepting them as payment. This requires decision-making about custody and mechanisms to quickly convert crypto into a currency with a stable value.

Current Gartner data indicates by 2024, 20 per cent of large organisations are set to use digital currencies for payments, stored value, or collateral. Global corporations, including Microsoft, Tesla, Mastercard and Starbucks, have already commenced accepting cryptocurrencies as payment for their product and services.

As growing acceptance drives innovation, corporate treasurers are turning their attention to gauge its potential merits. From their perspective, as these digital currencies become more common in business transactions, the potential advantages – ranging from instant payments and improved transaction processing speeds to uninterrupted access to cash – seem poised to outweigh the disruptions they may cause to existing cashflow management practices.

Digital coins are transacted and traded on networks operating 24/7. For a corporate treasurer managing payments across time zones, a globally connected marketplace that is always online and unconstrained by cut-off times holds tremendous appeal.

This is especially true from a liquidity management perspective as uninterrupted access to cash, similar to a domestic real-time payment mechanism, improves visibility, shortens settlement times and enhances daily cashflow for payments, as well as helping to cover debt or funding short-term investments.

The programmability of the digital coins allows many processes that currently involve multi-party handling to be automated, making the transaction itself more efficient and cost-effective. Additionally, the ability to manage a trusted cryptocurrency anytime and from anywhere, accounting for it, and understanding exactly where or with whom it’s being held presents enormous opportunity.

Programmable money will make features such as streaming payments and micropayments a reality, and businesses will be able to benefit from the capacity to ‘pay as you go’ for services at fractional intervals. Payments currently made when a service is delivered at predetermined levels of completion could, with a digital asset, be executed by a smart contract software instantly in smaller segments.

All of these capabilities point to upcoming changes in payments infrastructure, which will likely aid the inception of new business models. In the same way just-in-time inventory management has empowered companies to become competitive, a just-in-time payment system will likely give companies an edge over their peers in the marketplace.

Bridging the digital currency gap

At the same time, it is important to carefully consider the extreme volatility inherent in cryptocurrency markets, which is beyond the risk tolerance of most corporate treasurers. For that reason, their needs are being seen as potentially better served by alternatives, such as central bank digital currencies (CBDCs) or stablecoins.

As most central banks are still taking the narrow view of CBDCs as ‘payment instruments’ this may yield limited benefits in countries with advanced payments insfrastructure. The stablecoins that exit today are issued by largely unregulated operators and carry multiple risks.

Circulation of Stablecoins and Cryptocurrencies

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Source: McKinsey

As institutional investors increasingly boost their exposure to cryptocurrencies, there is need for a system that helps these entities ramp up investments seamlessly.

It falls upon TradFi participants to assess how they can support clients who want to introduce digital currencies and assets into the mechanics of their businesses and their balance sheets. Though efforts continue to be in the nascent stages, lenders are increasingly working with regulators and clients towards designing a suite of digital coins.

Relying on years of expertise in product development, risk management and regulatory compliance, banks like ANZ are prototyping digital coins and assets with a focus on improving the customer experience by enhancing qualities such as speed and cost-effectiveness to create more efficient business ecosystems.

A digital coin created out of such an approach can serve a wider range of use-cases, including programmability, tokenisation, non-fungible tokens (NFTs), and branding of digital value tokens.

From an institutional perspective, banks that actively facilitate the seamless use and management of cryptocurrencies, stablecoins and CBDCs – making their way into the financial mainstream and portfolios and digital wallets of consumers and corporates – will be ideally positioned to serve their clients well and help them navigate this fast-changing business landscape.


The (not too distant) Future of Money is Digital
Nigel Dobson, Hari Janakiraman & Inga Bambalaite-Saliba
Banking Services Portfolio Lead, Head of Industry and Innovation & Senior Digital Advisory Manager, ANZ
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